Every price in this course so far has been a mid: halfway between what buyers are bidding and what sellers are asking. You rarely trade there by accident. The gap between the two prices is a cost on every trade, in and out, and on a four-leg strategy it can eat a large share of your edge.
Two prices, not one
At any moment an option has two live prices. The highest price anyone will pay for it right now is the bid. The lowest price anyone will sell it for is the ask. The gap between them is the bid-ask spread, and halfway between is the mid. Say a call is quoted $3.40 bid, $3.60 ask: the mid is $3.50 and the spread is 20 cents.
Buy at the ask and the position is marked at the mid a second later: down 10 cents a share, $10 a contract, before the stock moves. Sell it back at the bid and you pay the other 10 cents: the round trip costs the full width, $20 a contract, the market maker's pay for taking the other side.
Spreads are quoted in cents, and even a cheap option carries a spread of a few cents. So the cost as a share of the price climbs fast as options get cheaper.
Call value against the stock price for four strikes, 30 days out at 30% volatility. Hover at $100: the at-the-money call is worth about $3.59 and the call 15% out about 22 cents, so the same 10-cent spread is under 3% of one and close to half of the other. Drag days down and the far strikes get cheaper still.
On that chart, a 10-cent spread is under 3% of the at-the-money call and close to half of the call 15% out of the money. Cheap options look like small bets, but in percentage terms they are the most expensive options on the board to trade.
Market orders and limit orders
A market order says "fill me now at whatever the other side is showing": the ask to buy, the bid to sell, and worse in a fast market or a thin contract, because the quote can move before your order arrives. A limit order says "fill me at this price or better, or not at all". There are other order types, but for options one rule covers almost everything: use a limit.
Working an order toward the mid
On a liquid contract, start at the mid and wait. If nothing fills within a minute or so, move the limit a few cents toward the other side and wait again. Market makers often meet a patient order somewhere between the mid and their own quote, so on active names fills at or near the mid are common. Decide in advance how far you will go: if the trade's edge is 30 cents a share and you have walked 15 cents toward the ask, half of it is gone before the trade starts.
Multi-leg orders and legging in
A spread, a straddle or an iron condor can go in as one multi-leg order: all the legs fill together at the net price you set, or none of them fill. The alternative, legging in, sends each leg on its own in the hope of a better total. Buy the $100 call first and, until the $105 call is sold, you hold the first leg's exposure to the stock, not the spread's.
The gap between the two lines is the value of the $100/$105 call spread. Hover at $98 and at $102: the first leg alone changes by about a dollar, the gap by well under half of that. Until the second leg is on, you hold the steeper line.
With the stock at $100 and 30 days left, the $100 call moves about 53 cents for each dollar in the stock; the spread, the gap between the two lines, moves about 22 cents. Hold the first leg alone in a moving market and you carry more than twice the position you meant to own. A multi-leg order removes that risk.
Slippage is a cost you can count
The difference between the price you expected and the price you got is slippage. Measured from the mid, it is up to half the spread on each leg, each time you trade. An iron condor has four legs. If each is 10 cents wide and you fill at the far side of every quote, you pay 5 cents a leg going in and 5 cents a leg coming out: 40 cents a share, $40 a condor. Against a $1.50 credit, that is more than a quarter of what you were paid to take the risk.
Liquidity: width and open interest
A contract is liquid when you can trade it in size without moving its price much. Two numbers tell you most of it. The first is the spread's width against the option's price: a few cents on a $5 option is liquid, 30 cents on a $1 option is not. The second is open interest: the number of contracts at that strike and expiration that have been opened and not yet closed.
Open interest clusters. Round-number strikes and the monthly expirations carry most of it, and an in-between strike on a single-stock chain can show a few dozen contracts next to tens of thousands one row away. When a trade works at either strike, the crowded one is usually cheaper to get into and out of.
The maths: what the spread costs as a share of the trade
Call the quoted width w and the mid m. Filling at the ask costs w / 2 against the mid, a fraction w / (2m) of the option's value. For a strategy with legs i = 1 ... n, where f is how far toward the far side of each quote you fill (0 at the mid, 1 at the bid or ask), the round-trip slippage per share is 2 × f × Σ (w_i / 2) = f × Σ w_i.
Worked example. For the iron condor above, n = 4 and every w_i = 0.10, so at f = 1 the slippage is $0.40 a share. Fill halfway between the mid and the far side, f = 0.5, and it drops to $0.20: $20 a condor saved on every round trip.
Your turn
Open MSFT on the Options Chain at the monthly expiration. Read the at-the-money call's Mid and OI, and compare that OI with the round-number strikes either side. Then price the SPY at-the-money straddle as one two-leg order.