Options Bid-Ask Spread: How It Affects Your Trades

The bid-ask spread is the difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask). In options trading, this spread is often wider than you'd see on stocks, and it directly affects your profitability.

What Creates the Bid-Ask Spread

Market makers post the bid and ask prices. They buy at the bid and sell at the ask, pocketing the difference as compensation for:

  • Inventory risk: They hold options positions that can move against them
  • Hedging costs: They buy and sell stock to hedge their options exposure
  • Capital commitment: They tie up money providing liquidity

    • The spread is wider when there's more uncertainty or less competition among market makers.

    The Real Cost of Wide Spreads

    When you buy an option, you typically pay near the ask. When you sell, you receive near the bid. The spread is a round-trip cost you absorb.

    Example with a tight spread:

  • Bid: $3.00 | Ask: $3.10 | Spread: $0.10 (3.3%)
  • You buy at $3.05 (mid-price), later sell at $3.05
  • Spread cost: ~$0.05 per share ($5 per contract)

    • Example with a wide spread:

  • Bid: $2.50 | Ask: $3.50 | Spread: $1.00 (33%)
  • You buy at $3.00 (mid), later sell at $3.00
  • Spread cost: ~$0.50 per share ($50 per contract)

    • That wide spread costs you 10x more and requires a much larger move in your favor just to break even. On a $300 option, losing $50 to the spread means you need a 17% gain on the option just to cover the entry and exit friction.

    What Causes Wide Spreads

    Low open interest. Few participants at that strike means less competition and wider spreads.

    Low underlying volume. Stocks that trade fewer shares have options with wider spreads because hedging is harder for market makers.

    Far from expiration. LEAPS options tend to have wider spreads than monthly options because there's more uncertainty and less trading activity.

    Deep OTM or deep ITM strikes. Activity concentrates around ATM strikes. Move far from the money and spreads widen.

    High implied volatility. When IV spikes, uncertainty increases and market makers widen spreads to compensate for the additional risk.

    Earnings and events. Spreads often widen ahead of binary events when the risk of a large move is highest.

    How to Minimize Spread Impact

    1. Trade Liquid Underlyings

    Stick to stocks and ETFs with robust options markets. SPY, QQQ, AAPL, MSFT, AMZN, TSLA, and META consistently offer tight spreads. Avoid options on thinly traded small-cap stocks.

    2. Use Limit Orders at the Mid-Price

    Never use market orders on options. Always start with a limit order at the mid-price (average of bid and ask):

  • Mid-price = (Bid + Ask) / 2
  • If the bid is $3.00 and ask is $3.40, start your limit at $3.20
  • If it doesn't fill after 30-60 seconds, adjust by $0.05 toward the natural side (higher if buying, lower if selling)

    • 3. Trade Near-the-Money Strikes

    ATM and slightly OTM options have the tightest spreads because that's where most activity concentrates. Moving to deep ITM or far OTM strikes widens spreads noticeably.

    4. Avoid Illiquid Expirations

    Monthly expirations are more liquid than weeklies for most stocks. If a weekly expiration shows a $0.50 spread and the monthly shows $0.10, the monthly is a better choice unless you specifically need that week.

    5. Check Open Interest Before Trading

    Open interest above 1,000 contracts at your strike is a reasonable minimum for liquid trading. Below 100 contracts, expect wide spreads and difficult fills.

    Spread Impact on Different Strategies

    | Strategy | Legs | Spread Impact | Long call or put1Low—single spread Vertical spread2Medium—two spreads Iron condor4High—four spreads Butterfly3High—three spreads | Calendar spread | 2 | Medium—but different expirations may have different liquidity |

    Multi-leg strategies multiply the spread cost. An iron condor on an illiquid name can cost $2.00+ in spread friction across four legs, which might exceed your expected profit on the trade.

    The Spread as a Trade Filter

    Use the bid-ask spread as a quality filter for your trades. If the spread is more than 10% of the option's price, reconsider:

  • Can you find a more liquid alternative?
  • Is there a different strike or expiration with a tighter spread?
  • Is the expected profit large enough to absorb the spread cost?

    • A trade that looks great on paper can become mediocre or negative once you account for realistic entry and exit prices. Factor in the spread before committing capital.