Do you like trading options but don’t have access to an option pricing model? Do bids and asks on equity options occasionally make little sense to you?

Even if you know the Black-Scholes option pricing model, it can be an arduous task to price an option. Furthermore, you may not have the most up-to-date standard deviation to put into the formula.

Well, if this rings a bell, you’re not alone.

This frustrating phenomenon is far from uncommon, particularly if you’re trading online through a discount brokerage or even via the website of a full service brokerage house or bank.

With that said, mispriced options are likely not the fault of your broker or the brokerage house he or she works for.

Don’t Blame Your Broker

It’s unlikely they’re trying to pull a fast one on you, as the market is highly regulated. Rather, these odd prices are largely due to the fact that some equity options are just plain illiquid.

Here’s the issue: If the underlying equity is illiquid, then there’s a high probability that options on that stock are going to be even more illiquid.

Even options on many liquid stocks don’t trade very often. Of course, there are always exceptions, but it’s still a good rule of thumb to trade by.

Take Piedmont Natural Gas Co. Inc. (PNY), for example. It’s trading at $57.56 as of this writing. Now let’s go to PNY’s option chain, listed on the website of a prominent brokerage house:

As you can see above, there are lists of puts and calls, with the expiration date of November 20, 2015 used as an example. As the strike price of the call increases for any specific expiration, the price of the option should decrease, and the opposite should occur with put options.

While these price increases and decreases aren’t always linear, there should be some consistency.

Yet the consistency breaks down with this particular stock, as the highlighted bids and asks above reveal. It appears that the options are mistakenly mispriced or else there’s little logic to how these options are priced.