How are options prices being updated ?

Question

Are options prices being updated manually by market makers, or by certain special software to reflect constantly changing stock prices ?

Answer 1

It is almost certainly a combinaion of the two.

An automated software package cannot calculate prices without some specific input from the market makers, implied volatility and bid-ask spread. In addition, a market maker has to have the ability to adjust the computed results. The end result is the market makers bid and ask quotes. If a small market order comes in, the trade is performed automatically without ever going to the pit. The trade is performed at the lowest ask quote (if it is a buy order) or the highest bid quote (it it is a sell order). If a retail customer has an outstanding limit order at that price it is filled first. If the entire order cannot be filled by retail limit orders, (a) market maker(s) with the same quote is randomly assigned to fill the rest of the order.

When a limit order between the bid and ask quotes, or a large order, comes in it is not automatically filled. It is sent to the pit by a representative of the broker who will yell out the order, for example "Listen up! I want to sell 100 XYZ May 10 puts." Any market maker willing to buy some of the puts for more than his current quote bid will yell back how many he is willing to buy and at what price. If any of the prices meet or exceed the limit specified, the broker representative will make the sale. If the limit price is not met, the order goes to the Order Book Official who will enter the order into the automated quote system. That order limit price will then display as the ask quote for the whole world to see.

N.B. I am not and have never been a professional trader. This answer is my understanding from what I have read in a book but may be dated.

Answer 2

If you are talking about how market makers price options and make money, that process is most certainly updated by special software to reflect changing stock prices. In most cases, they are even using special proprietary models.

If you are talking about price quotes that you see via various quote services, those often reflect the last trade and do not reflect the actual market.