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Option Price Improvement: Measuring Execution Quality

For educational purposes only; not investment advice.

Direct answer

Section titled “Direct answer”

Option price improvement occurs when an order executes at a price better than the relevant executable benchmark available when the order reached the market. For a buy, lower is better; for a sell, higher is better:

buy improvement = benchmark ask - fill price

sell improvement = fill price - benchmark bid

Multiply per-unit improvement by the contract multiplier and filled quantity. A buy filled at $2.12 against a timestamped $2.00 bid / $2.20 ask improves by $0.08, or $8 for one 100-multiplier contract.

The trader’s limit is not automatically the benchmark. Filling below a generous buy limit may satisfy the order without improving on the market. The comparison must preserve the quote, time, size, contract, and routing context.

Define the benchmark before calculating

Section titled “Define the benchmark before calculating”

Record the exact option series, side, quantity, order type, limit, time in force, submission and broker-receipt timestamps, contemporaneous NBBO with sizes, route or auction information, fills, fees, and cancellations.

The displayed NBBO is a starting point, not always a complete executable benchmark. Its size may cover only part of the order; quotes can change between observation and arrival; complex orders have a net package market; and adjusted contracts require the correct multiplier and deliverable.

For partial fills, use quantity-weighted average execution price:

VWAP fill = Σ(fill price_i × quantity_i) / Σ(quantity_i)

If the benchmark quote changes during a worked order, compare each fill with the valid benchmark at that fill or use a clearly defined arrival-price methodology. Do not compare all fills with whichever quote makes the result look best.

Price improvement is only one execution-quality component:

  • Quoted spread: ask - bid at the benchmark time.
  • Effective spread for a buy: 2 × (fill - midpoint); negative values indicate a fill better than midpoint.
  • Delay cost: market movement while seeking a better price.
  • Opportunity cost: intended quantity that never fills and its subsequent market outcome.
  • Fees and rebates: can change net economics even when gross fill price improves.

A fast fill at the ask has zero price improvement against that ask but may be appropriate for urgent risk reduction. A patient limit may obtain improvement yet expose the account to non-fill or adverse market movement. Improvement should not be maximized in isolation.

One order, three measurements

Section titled “One order, three measurements”

A five-contract buy arrives when the option NBBO is $2.00 × 20 / $2.20 × 10. The trader’s limit is $2.18. It fills two contracts at $2.12 and three at $2.16 while the benchmark ask remains $2.20.

VWAP fill = [(2 × $2.12) + (3 × $2.16)] / 5 = $2.144

improvement per share = $2.20 - $2.144 = $0.056

gross improvement = $0.056 × 100 × 5 = $28

The arrival midpoint was $2.10. Effective spread is:

2 × ($2.144 - $2.10) = $0.088 per share

The execution is better than the ask but worse than midpoint. Calling it a $0.036 improvement because it filled below the $2.18 limit would use the wrong benchmark; the limit describes the worst allowed price, not the competing displayed market.

Now assume a second five-contract order waits for $2.10, receives no fill, and the market moves to $2.50 / $2.70. It reports no execution and therefore no realized price improvement. If the position was still needed, the unfilled order created opportunity or delay cost that should be logged. A fill-only report would hide it.

For a two-leg spread, suppose the package market is $1.40 bid / $1.55 ask net debit and the package fills at $1.50. The meaningful gross buy improvement is $0.05 × 100 = $5 per spread. Adding “improvement” measured separately on each leg can double count or use leg quotes that were never simultaneously executable.

Measurement and execution risks

Section titled “Measurement and execution risks”
  • Wrong benchmark: a customer limit, stale quote, later midpoint, or model value is not the arrival NBBO.
  • Timestamp mismatch: milliseconds can matter in a moving option market.
  • Size mismatch: displayed best-price quantity may not cover the order.
  • Partial-fill bias: measuring only favorable fills ignores remaining quantity.
  • Survivorship bias: analyzing filled orders while excluding canceled and unfilled orders overstates quality.
  • Complex-order error: leg-level comparisons can misstate package execution.
  • Fee omission: routing, contract, exchange, and broker charges alter net improvement.
  • Market-impact omission: the order itself can change available prices.
  • Adjusted-contract error: multiplier or deliverable mistakes distort dollar results.
  • Urgency tradeoff: waiting for improvement can leave a hedge or risk exit undone.
  • Adverse selection: a favorable fill may occur just before the option value moves against the order.

Common misconceptions

Section titled “Common misconceptions”
  • “Any fill below my buy limit is price improvement.” Improvement is measured against a defined market benchmark, not merely the limit.
  • “A midpoint fill is always fair.” The midpoint may be stale or unsupported by size.
  • “More improvement always means better execution.” Delay, non-fill, impact, and fees also matter.
  • “The displayed ask was available for my entire order.” Its quoted size may be smaller.
  • “An unfilled order has zero execution cost.” It may create opportunity and risk-management costs.
  • “Each spread leg’s improvement can be added.” The executable package is the proper benchmark for a complex order.
  • “Price improvement proves broker best execution.” Best execution is a broader assessment than one fill statistic.
  • “A favorable fill predicts investment profit.” Execution quality and subsequent market outcome are separate questions.
Section titled “Related topics”

Authoritative sources

Section titled “Authoritative sources”