Bid-Ask Spread in Options: Why It Matters
Understand the bid-ask spread—the hidden cost that affects every options trade you make.
What is Bid-Ask Spread?
Bid-Ask Spread is the difference between the highest price buyers will pay (bid) and the lowest price sellers accept (ask). It's essentially the cost of immediacy.
Wide spreads mean higher trading costs. Market makers profit from the spread. Liquid options have tight spreads.
TL;DR - Quick Answer
Bid = what buyers pay. Ask = what sellers want. Spread = Ask - Bid = your cost. Wide spread = expensive to trade. Always check spread before trading. Use limit orders, not market orders. Liquid options (SPY, AAPL) have tight spreads.
What Is the Bid-Ask Spread?
Bid: The highest price someone is willing to pay for an option right now.
Ask: The lowest price someone is willing to sell an option for right now.
Spread: The difference between ask and bid.
Example: Bid $2.50, Ask $2.70. Spread = $0.20 (or 20 cents).
Why It Matters
If you buy at $2.70 and immediately sell, you get $2.50. You've lost $0.20 per share ($20 per contract) instantly.
For a round trip (buy then sell), you pay the spread TWICE. That's $40 per contract in the example above.
Impact on Returns
On a $2.00 option with $0.20 spread, you need a 10% move just to break even on the spread!
What Causes Wide Spreads?
- Low volume/liquidity
- High volatility/uncertainty
- Far OTM or deep ITM options
- Distant expirations
- Small underlying stocks
How to Minimize Impact
- Trade liquid options (high volume/OI)
- Use limit orders, not market orders
- Trade during market hours (not pre/post)
- Stick to popular underlyings (SPY, QQQ, AAPL)
- Trade ATM options (tightest spreads)
Key Takeaways
- Spread = hidden cost of every trade
- Wide spreads destroy profits
- Always use limit orders
- Liquid options = tight spreads
Related Options Strategies
Options Liquidity
Finding liquid options.
Options Chain
Where to see spreads.
Understanding related strategies helps you choose the best approach for your market outlook and risk tolerance. Each strategy has unique characteristics that make it suitable for different market conditions.
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