The bid-ask spread is the gap between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an options contract. This spread represents a hidden cost of trading options.
Why It Matters: When you sell an option, you generally receive the bid price — not the midpoint. When you buy to close, you pay the ask price. Wide spreads (e.g., $0.50 wide on a $1.00 option) cost you 25% of the option's value just in slippage.
What Causes Wide Spreads: Illiquid stocks with low options volume, low open interest, high implied volatility, or very short/long expiration dates tend to have wide spreads. Wheel traders should stick to highly liquid underlyings like SPY, AAPL, MSFT, or other high-volume names to minimize spread costs.
Examples of Bid-Ask Spread in Action
- 1A bid of $1.40 / ask of $1.60 — placing a limit order at the midpoint ($1.50) is typically the best execution strategy.
- 2An illiquid stock with a $0.80 / $1.20 bid-ask — the $0.40 spread on a $1.00 option is a 40% slippage cost.
- 3SPY options often trade with $0.01-$0.03 spreads on liquid strikes — near-zero slippage.