An option bid is the price an option buyer is willing to pay for the option. If the stock option is fairly ill liquid, and less than 100 contracts have traded that day, the bid is likely to be a Market Maker. Market Makers are required to provide a 10-up market. That means that the bid and ask are good for at least 10 contracts. Market Maker firms have sophisticated auto quote systems that dynamically update based on the bid and ask of the underlying stock and the bids and asks for each specific stock option on other exchanges. The liquidity of the stock impacts the liquidity of the option. Mega-cap stocks have tremendous trading volume and the options trade actively. In these situations the bid might be another option trader. You can often sell an option for a nickel or a dime better than the bid and I always suggest trying that first. If the option trade does not get filled right away and you need to get out, cancel the order and hit the bid.
December 2, 2008