The bid-ask spread is one of the hidden costs of options trading that many beginners overlook. Every time you buy or sell an option, the spread takes a bite out of your potential profits. Understanding how spreads work and how to minimize their impact can significantly improve your trading results.
What is the Bid-Ask Spread?
The bid-ask spread is the difference between the highest price buyers are willing to pay (bid) and the lowest price sellers are asking (ask).
Key definitions:
- Bid Price: The highest price someone is willing to pay right now
- Ask Price: The lowest price someone is willing to sell for right now
- Spread: Ask Price - Bid Price
How the Spread Affects You
When you trade options:
- Buying: You typically pay the ask price (higher)
- Selling: You typically receive the bid price (lower)
This means if you buy an option and immediately sell it, you would lose the spread amount.
Example: Spread Cost
AAPL $200 call shows: Bid $4.50, Ask $4.70
- Spread = $4.70 - $4.50 = $0.20
- If you buy at $4.70 and immediately sell at $4.50, you lose $0.20 per share
- That is $20 per contract ($0.20 x 100 shares)
- On a 10-contract trade, the spread costs you $200
Tight vs Wide Spreads
Tight Spread (Good)
A tight spread has a small difference between bid and ask. Examples:
- Bid $3.00, Ask $3.02 (spread = $0.02)
- Bid $5.50, Ask $5.55 (spread = $0.05)
Tight spreads are found in liquid, actively traded options.
Wide Spread (Bad)
A wide spread has a large difference between bid and ask. Examples:
- Bid $1.00, Ask $1.50 (spread = $0.50)
- Bid $0.10, Ask $0.25 (spread = $0.15)
Wide spreads are found in illiquid options and can eat your profits.
Important measure: Look at the spread as a percentage of the option price. A $0.20 spread on a $10 option (2%) is fine. A $0.20 spread on a $1 option (20%) is terrible.
What Causes Wide Spreads?
Low Liquidity
When few traders are interested in a particular option, market makers widen spreads to compensate for risk. Illiquid options (low volume, low open interest) always have wider spreads.
Market Volatility
During high volatility or market stress, spreads widen. Market makers increase their compensation for the increased risk of prices moving quickly against them.
Time of Day
Spreads are typically widest at market open and close. The tightest spreads usually occur mid-morning to mid-afternoon when trading is most active.
Far Out-of-the-Money Options
Options that are very far from the current stock price often have wider spreads because fewer people trade them.
Distant Expirations
Options with expirations many months away (LEAPS) often have wider spreads than options expiring soon.
Example: Spread Comparison
Same stock, different strikes and expirations:
- Weekly ATM call: Bid $2.45, Ask $2.48 (spread 1.2%)
- Weekly OTM call: Bid $0.45, Ask $0.55 (spread 22%)
- Monthly ATM call: Bid $4.80, Ask $4.90 (spread 2%)
- LEAPS ATM call: Bid $15.00, Ask $16.00 (spread 6.7%)
How to Calculate the True Cost
Round-Trip Cost
The real cost of the spread is what you pay on both entry and exit:
Example: Round-Trip Spread Cost
You trade an option with Bid $5.00, Ask $5.20:
- Entry: You pay $5.20 (ask)
- Even if price stays same, you would sell at $5.00 (bid)
- Round-trip spread cost: $0.20 per share ($20 per contract)
The option needs to move $0.20 in your favor just to break even on the spread.
Tips for Dealing with Spreads
1. Trade Liquid Options
Stick to options with high volume and open interest. These will have the tightest spreads. Major stocks like AAPL, TSLA, SPY typically have excellent liquidity.
2. Use Limit Orders
Never use market orders on options. Always use limit orders and try to get filled between the bid and ask (the "mid price").
Example: Using the Mid Price
Option shows Bid $3.00, Ask $3.20:
- Mid price = ($3.00 + $3.20) / 2 = $3.10
- Start your limit order at $3.10
- If not filled, adjust to $3.12, then $3.14, etc.
- You may save $0.10 vs paying the full ask
3. Check the Spread Before Trading
Always look at the bid-ask spread before entering a trade. If the spread is too wide, consider a different strike or expiration.
4. Avoid Trading at Market Open
Spreads are widest in the first 15-30 minutes of trading. Wait until spreads tighten before entering positions.
5. Trade Options on High-Volume Stocks
Options on popular, heavily-traded stocks have better liquidity and tighter spreads than options on obscure small-cap stocks.
6. Consider Weekly Options for Active Trades
Weekly options on popular underlyings often have excellent liquidity and tight spreads.
When Wide Spreads are Acceptable
Sometimes you may accept a wider spread:
- Long-term holds: If holding for months, the spread is a smaller part of total return
- High-conviction trades: When you expect a big move that dwarfs the spread
- Unique opportunities: When only certain strikes offer the setup you want
But even then, always try to get a better fill with limit orders.
Track Your Trading Costs
Pro Trader Dashboard helps you see the true cost of your trades, including slippage and spread impact. Understand where your money is going and optimize your execution.
Summary
The bid-ask spread is the difference between what buyers bid and sellers ask. It represents a hidden cost that eats into your profits on every trade. Tight spreads are found in liquid options; wide spreads in illiquid ones. Always use limit orders and try to get filled at the mid price. Check the spread before trading and avoid options where the spread is a large percentage of the option price.
Learn more about options volume or read our guide on how to read an options chain.