Bid-Ask Spread
The difference between the buy and sell price — and why it matters.
The bid-ask spread is the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask). In options, this spread represents an immediate cost of trading — if you buy at the ask and sell at the bid, the spread is your loss before the trade even moves.
Why It Matters
The bid-ask spread is a hidden cost that many traders overlook. A $0.10 spread on a stock option might seem small, but it is $10 per contract. Trade 5 contracts in and out, and that's $100 in spread costs. Do that 50 times a year, and you've lost $5,000 — just in spreads.
Wide spreads also make it harder to manage positions. If you need to adjust or exit a trade, a wide spread means you are giving up more edge each time. Traders who consistently trade narrow-spread options have a structural advantage over those who don't filter for liquidity.
How It Works
What determines the spread width:
- Liquidity — Highly traded options (AAPL, SPY, QQQ) have penny-wide spreads. Thinly traded options can have spreads of $0.50 or more.
- Volatility — Higher IV leads to wider spreads as market makers increase their edge to account for risk.
- Time to expiration — Far-out expirations with low open interest tend to have wider spreads.
- Moneyness — ATM options typically have the tightest spreads. Deep OTM and deep ITM options often have wider spreads.
The spread as a cost: When you buy at the ask ($2.50) and the bid is $2.30, you are immediately $0.20 per share underwater. The option must gain $0.20 just for you to break even if you sold it right back. This is the spread cost.
For multi-leg strategies (spreads, condors), the spread cost compounds. An iron condor with 4 legs, each with a $0.10 spread, has a total spread cost of up to $0.40 per share. That is $40 per condor in execution costs.
How to minimize spread costs:
- Trade liquid underlyings with high open interest
- Use limit orders at the mid-price
- Avoid trading the first and last 15 minutes of the day when spreads are widest
- Enter multi-leg trades as a single order (net price) rather than legging in
- Compare the spread to the option's price — a $0.20 spread on a $1.00 option (20%) is far worse than a $0.20 spread on a $10.00 option (2%)
Quick Example
You want to trade an iron condor on two different stocks:
Stock A (liquid): Each leg has a $0.02 spread. Total spread cost for 4 legs: $0.08 per share ($8 per condor). Net credit collected: $1.20. Spread cost is 6.7% of the credit.
Stock B (illiquid): Each leg has a $0.25 spread. Total spread cost for 4 legs: $1.00 per share ($100 per condor). Net credit collected: $1.50. Spread cost is 67% of the credit.
Stock B's trade gives back two-thirds of its profit to the spread before it even begins. That is not a viable trade.