The Bid-Ask Spread: The Hidden Cost Every Options Investor Must Respect

Every options quote on every options chain shows two prices, not one.

The bid is the highest price a buyer is currently willing to pay for the contract. The ask is the lowest price a seller is currently willing to accept. The difference between them is the bid-ask spread.

When you buy an option, you pay at or near the ask. When you sell an option, you receive at or near the bid. The spread is the gap between those two prices, and navigating it is not optional. It is the unavoidable friction of every options transaction.

In a liquid, actively traded market the spread might be $0.05 or less. You barely notice it. In a thinly traded, illiquid market the spread might be $0.50 or more. On a $1.50 option, that spread represents a third of the option's value paid in transaction friction before the trade has even had a chance to work in your favor.

What Creates the Spread

The bid-ask spread exists because options markets are quote-driven. Market makers post bid and ask prices for options contracts, providing liquidity by agreeing to buy or sell at any time. The spread between their bid and ask is their compensation for providing that liquidity and for taking on the risk of holding options positions while waiting for a counterparty.

When an options contract is actively traded with high volume and open interest, multiple market participants are competing to provide liquidity. That competition narrows the spread. When a contract is thinly traded with low volume and open interest, fewer participants are competing and market makers widen their spread to compensate for the increased risk of holding the position.

This is why checking volume and open interest on the options chain before placing any trade is not a secondary consideration. It is the direct predictor of the spread you will encounter.

The Midpoint and Why It Matters

When you see a bid of $1.40 and an ask of $1.60, the midpoint is $1.50. The midpoint is the theoretically fair price at which both buyer and seller would be treated equally.

In liquid markets, limit orders placed at the midpoint are filled quickly and consistently. The market is competitive enough that both sides of the spread regularly meet in the middle.

In illiquid markets, midpoint fills are harder to get. Market makers are less motivated to move from their posted prices when volume is thin. In these situations, you may need to give a small amount of price concession to get filled: bidding slightly above the midpoint to buy or offering slightly below the midpoint to sell.

The critical rule that follows: never use market orders on options. A market order on a thinly traded options contract executes at whatever price is available, which can be significantly away from the midpoint. You can easily pay the full ask price when buying, or receive the full bid price when selling, losing the entire spread in one transaction. Limit orders only. Always.

How to Find Liquid Options

Not every underlying stock has good options liquidity. The stocks and ETFs that tend to have the tightest options spreads share several characteristics.

High stock trading volume is the starting point. Stocks that trade millions of shares per day have active institutional participation that carries through to the options market.

Large market capitalization. The largest companies in the S&P 500, along with the major sector ETFs like SPY, QQQ, IWM, GLD, and SLV, tend to have exceptional options liquidity with spreads measured in pennies.

High options open interest. When an underlying has tens of thousands or hundreds of thousands of open options contracts across multiple strikes and expirations, the liquidity is broad. You can trade nearly any reasonable strike without encountering wide spreads.

Upcoming catalysts or significant investor interest. Some mid-cap stocks have active options markets because they attract significant speculative or hedging interest. Earnings-driven volatility and sector events can temporarily improve liquidity on stocks that are otherwise less active.

For the income-focused strategies in this series, the practical guidance is to start with the most liquid underlyings available and expand to less liquid ones gradually as experience and account size grow. Wide spreads on illiquid options erode the income advantage before it has a chance to accumulate.

The Spread in Context

Consider a cash-secured put where you are trying to collect $1.50 in premium. The bid-ask spread is $0.30 wide, with a bid of $1.35 and an ask of $1.65. If you sell at the bid of $1.35, you have already given up $0.15 of your intended income before the trade begins. If you sell at the midpoint of $1.50, you capture your full intended premium. The difference is 10 percent of the trade's total income potential.

Across twenty similar trades per year, that $0.15 per contract difference compounds to meaningful money. Not the largest factor in long-term options income, but one of the most reliably controllable ones.

Understanding the spread and executing at or near the midpoint consistently is the discipline that separates investors who achieve the theoretical return of their strategy from those who systematically underperform it.

Frequently Asked Questions

What is a good bid-ask spread for options trading? There is no single universal standard, but as a practical guideline, a spread of $0.10 or less is tight and indicates a liquid market where midpoint fills are consistent. A spread of $0.10 to $0.30 is acceptable on most mid-cap stocks and still allows reasonable midpoint execution with a limit order. A spread of $0.50 or more is wide and should prompt caution. On a $1.00 option, a $0.50 spread means you are paying 50 percent of the option's value in transaction friction if you execute at the midpoint from either side. Sticking with highly liquid underlyings for your primary income strategies keeps you in the acceptable range consistently.

Why should I never use market orders on options? Market orders on options execute immediately at whatever price is currently available, which is often significantly away from the midpoint in less liquid markets. If the best ask is $1.65 and the best bid is $1.35, a market buy order executes at $1.65 and a market sell order executes at $1.35. You lose the entire $0.30 spread in one transaction. A limit order placed at $1.50, by contrast, either fills at a fair price or does not fill at all, giving you control over the execution price. In liquid markets like SPY or QQQ, the difference is small. In less liquid markets it can be the difference between a profitable and an unprofitable trade before a single day has passed.

Does the bid-ask spread affect both entering and exiting a position? Yes. Every transaction, whether opening or closing a position, involves navigating the bid-ask spread. This means the spread cost applies twice over the full life of a trade: once at entry and once at exit. For strategies where you close positions at 50 percent of maximum profit, the exit spread is also a real cost. This is another reason that liquid underlyings with tight spreads compound their advantage over illiquid ones. The execution efficiency accumulates in both directions across every trade.

Probabilities over predictions,

Andy

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This newsletter is for educational purposes only and should not be considered investment advice. Options trading involves significant risk and is not suitable for all investors. Past performance does not guarantee future results. Always consult with a qualified financial professional before making investment decisions.