What Is the Significance of the ‘Mid-Price’ When Calculating the Value of an Options Trade?
The mid-price, which is the average of the bid and ask prices, is often considered the theoretical fair value of an options contract at a given moment. It is used as a reference point for execution quality.
When a trade is executed exactly at the mid-price, it represents zero cost of immediacy (zero slippage) relative to the spread. Traders often use the mid-price as the target for limit orders to achieve the best possible execution.
Glossar
Cost of Immediacy
Pricing ⎊ Cost of Immediacy reflects the premium paid, often manifested as adverse selection or slippage, to execute a trade instantaneously against the prevailing limit order book, rather than waiting for passive execution at the midpoint.
Theoretical Fair Value
Valuation ⎊ Theoretical Fair Value, within cryptocurrency options and financial derivatives, represents a model-derived price for an asset or contract, predicated on present value calculations of expected future cash flows and risk-adjusted discount rates.