Subject: Re: Buying Long Dated Calls
How does the market maker or algo set the bid/ask price for a certain option? Is it a black box? Or Black-Scholes box? Or more to it that that?
For example, today BRK-B 12/26 call with $300 strike is bid $178.30 ask $182.50.
How are those bid/ask prices arrived at?

My guess. They use something akin to Black-Scholes to arrive at a fair market price for each option. And they decide on a spread that would fairly compensate them for their effort and risk of being a market maker. And then they more or less double that spread to catch free money from rubes who enter market orders or accept whatever the quoted limit is.

But it's not always that way. Sometimes a trader will have an open limit order to buy or sell a particular contract, which will affect the spread at the bid or the ask end, or both. When you see an unusually large spread, like 0.50 bid - 3.00 ask, you know pretty clearly that there are no open limit orders and it's only the market maker setting his rube trap. Other times it's impossible to tell, as far as I know.

Elan