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+Finding Mispriced Options    • 147
+the near at-the-money (ATM) strikes were the most active because of the 
+two far OTM options that traded; one’s price didn’t change at all, and the 
+other went up by 1 cent. On a day in which the underlying stock fell, these 
+calls theoretically should have fallen in price as well (because the K/S ratio, 
+the ratio of strike price to stock price, was getting slightly larger). This just 
+shows that sometimes there is a disconnect between theory and practice 
+when it comes to options. 
+To understand what is probably happening, we should understand 
+something about market makers. Market makers  are employees at bro-
+ker-dealers who are responsible for ensuring a liquid, orderly securi-
+ties market. In return for agreeing to provide a minimum liquidity of 
+10 contracts per strike price, market makers get the opportunity to earn 
+the bid-ask spread every time a trade is made (I will talk about bid-ask 
+spreads later). However, once a market maker posts a given price, he or 
+she is guaranteeing a trade at that price. If, in this case (because we’re 
+dealing with OTM call options), some unexpected positive news comes 
+out that will create a huge rise in the stock price once it filters into the 
+market and an observant, quick investor sees it before the market maker 
+realizes it, the investor can get a really good price on those far OTM call 
+options (i.e., the investor could buy a far OTM call option for 1 cent and 
+sell it for 50 cents when the market maker realizes what has happened. 
+To provide a little slack that prevents the market maker from losing too 
+much money if this happens, market makers usually post prices for far 
+OTM options or options on relatively illiquid stocks that are a bit unrea-
+sonable—at a level where a smart investor would not trade with him or 
+her at that price. If someone trades at that price, fine—the market maker 
+has committed to provide liquidity, but the agreement does not stipulate 
+that the liquidity must be provided at a reasonable price. For this reason, 
+frequently you will see prices on far OTM options that do not follow the 
+theoretical “rules” of options.
+Bid-Ask
+For a stock investor, the difference between a bid price and an ask price 
+is inconsequential. For option investors, though, it is a factor that must 
+be taken into consideration for reasons that I will detail in subsequent