Common Options Mistakes

How the Bid-Ask Spread Costs You Money on Every Options Trade

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How the Bid-Ask Spread Costs You Money on Every Options Trade

The bid-ask spread on options is the invisible tax that eats into your returns on every single trade. Understanding how this spread works—and how to minimize it—is one of the fastest ways to improve your bottom line as an options trader. Most traders focus on getting the direction right but ignore the cost structure that can turn a breakeven trade into a loss or cut a winning trade's profit in half.

When you place an options trade, you're not negotiating with a computer. You're competing against market makers who profit from the difference between what they buy options for (the bid) and what they sell them for (the ask). On a stock, the spread might be a penny. On an options contract, it could be the entire difference between your profit and loss. The bid-ask spread on options is wider because options are less liquid than stocks, there are thousands of strike prices and expirations to quote, and the underlying prices change constantly, creating risk for market makers.

Quick definition: 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). On options, this spread is typically much wider than on stocks because options are less liquid and more complex to price correctly.

Key takeaways

The bid-ask spread on options is your first transaction cost and often exceeds brokerage commissions
Spread width varies dramatically by expiration date, liquidity, and distance from the current stock price
Using limit orders instead of market orders can save you hundreds of dollars per trade
Bid-ask spread cost is one of the reasons far out-of-the-money options are expensive on a percentage basis
Paying even 5% too much on entry erases three years of 5% annual gains from a successful trading strategy
The spread shrinks as you move closer to expiration and closer to the at-the-money strike

The True Cost of Ignoring the Spread

Most options traders quote their entry price without considering whether they paid the bid, the ask, or something in between. This is like quoting your home's purchase price at the asking price without mentioning the negotiated discount. If you buy 10 call options at the ask price and sell them later at the bid price, you're absorbing the full spread twice—once on entry and once on exit.

On a recent example, consider a call option expiring 30 days out on a $100 stock, struck at $102. The bid might be $1.20 and the ask $1.40—a spread of $0.20 or 16.7% of the bid price. If you buy 100 contracts at the ask ($1.40), you pay $14,000. If you later sell those same contracts and receive the bid ($1.20), you've lost $2,000 before any price movement in the underlying stock. Your stock would need to rise $2 just to break even on the spread alone, assuming the option's intrinsic value doesn't increase due to time decay and implied volatility changes.

The spread is wider for options further from the money. An out-of-the-money call $10 above the current stock price might have a bid of $0.10 and an ask of $0.30—a spread of 200%. You can lose your entire trade cost to the spread if the stock doesn't move enough in your direction. This is why far out-of-the-money options look cheap by absolute price but are expensive on a percentage basis.

Why Options Spreads Are So Much Wider Than Stock Spreads

On a large-cap stock like Apple or Microsoft, the bid-ask spread is often just a penny—the minimum tick size. But the same applies to options: on deeply liquid contracts, the spread can be a penny too. The difference is that options spreads are quoted in dollars, not cents.

A one-cent spread on a $1.00 option is a 1% cost. A one-penny spread on a $100 stock is 0.01%. When market makers quote options, they must account for several risks that don't apply to stocks. First, they don't know where the underlying stock will be five minutes from now. If they buy a call from you and the stock drops, they've just lost money. They add a buffer—the spread—to compensate for this risk.

Second, options prices depend on implied volatility, which can change rapidly even if the stock price doesn't move. A market maker who buys your put option hopes the market for puts doesn't shift before they sell it to someone else. If it does, they're stuck. Third, market makers juggle thousands of strike prices across dozens of expirations. They can't be an expert in every single one, so they widen the spread as compensation for uncertainty.

Finally, options are less liquid than stocks. Fewer people trade the $115 calls expiring in three months than trade the actual stock. Lower volume means fewer opportunities to offset a position quickly, so market makers charge more.

How Expiration Date Affects the Spread

The spread widens dramatically as you move further from expiration. Options expiring in one day might have a spread of $0.01 on a liquid contract. Options expiring in nine months might have a spread ten times wider. This is because traders are far more active in near-term contracts, creating competition between market makers and tighter pricing.

If you're buying options to hold for six months, you're paying a premium for the privilege. Your best strategy is to accept a slower execution and use limit orders rather than market orders. A limit order to buy at $1.35 instead of the $1.40 ask might take five minutes to fill, but it saves you $0.05 per contract, or $500 on 100 contracts. That's real money.

For options expiring in one to three weeks, spreads tighten considerably. These are the sweet spot for traders seeking reasonable pricing without sacrificing liquidity. Contracts expiring in one to two days are the tightest, but they move so fast that even a small directional miss becomes a large percentage loss.

Distance from At-the-Money Affects Spread Width

Options closest to at-the-money (ATM)—where the strike price equals or nearly equals the current stock price—have the tightest spreads. A call option where the strike is $0.50 above the stock price might have a $0.02 spread. The same call $5 above might have a $0.15 spread, and $10 above might have a $0.40 spread.

This happens because traders focus their attention on ATM options. More volume means more competition and tighter pricing. Far out-of-the-money (OTM) options have fewer traders, so market makers widen the spread. Buying OTM options is like paying a liquidity tax—you're paying extra for the privilege of trading something that isn't popular.

This is an important lesson for strategy selection. If you're using call spreads or put spreads, the liquidity of the wider-spread leg will hurt your overall execution. A bull call spread where you sell the far OTM call might cost you as much in spread on the short leg as you'll gain in premium.

Bid-Ask Spread Flowchart

Real-World Examples

Consider a trader managing a bull call spread on Netflix. The stock is trading at $175, and the trader wants to buy the $175 call and sell the $180 call, both expiring in 30 days.

The $175 call has a bid of $8.50 and an ask of $8.70—a spread of $0.20. The $180 call has a bid of $5.20 and an ask of $5.60—a spread of $0.40. If the trader uses market orders, they buy at $8.70 and sell at $5.20 for a net debit of $3.50 per contract, or $350 per spread. If they use limit orders and patiently negotiate, they might buy at $8.55 and sell at $5.40 for a net debit of $3.15. Over 10 spreads, that's a $350 savings—enough to turn a break-even trade into a winner.

Another example: a trader buys 5 call options expiring in 45 days on a $50 stock, striking at $52. The bid is $1.80 and the ask is $2.10. Using a market order, the trader pays $1.05 per share, or $525 total. If the stock rises to $53 and the call's intrinsic value increases to $1, the trader might sell at the bid of $1.20 (if the option's extrinsic value decays and implied volatility drops). The trader has lost $0.90 per share ($450) to the spread across entry and exit, even though the underlying stock moved in the right direction.

Common Mistakes

Mistake 1: Always using market orders for speed. Many traders fear missing a move, so they buy at the ask and sell at the bid automatically. In reality, options move slowly enough that a limit order waiting a few seconds or minutes costs far less than the spread premium you're giving up.

Mistake 2: Ignoring the spread when comparing strategies. A naked call looks cheaper to enter than a call spread until you realize the call spread's short leg has a wider spread that eats into your credit. Always calculate the true all-in cost.

Mistake 3: Trading far out-of-the-money options without considering the spread percentage. An OTM call might cost $0.30, but if the spread is $0.15, you're paying 50% of the option's value just to enter. These options fail to make money more often than they succeed, and the spread makes the math even worse.

Mistake 4: Focusing only on the bid-ask spread and forgetting about implied volatility crush. You might get a great entry price, but if implied volatility is unusually high, it will crush as the expiration approaches, wiping out your gains even if the direction is right.

Mistake 5: Not adjusting for time of day. Spreads are widest at market open (first 30 minutes) and narrowest during the mid-day hours when volume peaks. Waiting to trade until 10:30 AM instead of 9:35 AM can save you 20-30% on the spread.

FAQ

What is a fair bid-ask spread on options?

For liquid, at-the-money options expiring in one to three weeks, a fair spread is typically $0.05 to $0.10 on contracts worth $1 to $5. For further out-of-the-money options or longer expirations, spreads can widen to $0.20 or more. Any spread greater than 10% of the bid price suggests low liquidity.

Should I always submit a limit order?

Not always. If the spread is very tight ($0.01 or $0.02) and you're trading a heavily liquid option, the time cost of waiting might exceed the savings. But for any spread $0.10 or wider, a limit order is worth it.

Can I negotiate a better spread directly with my broker?

Most retail brokers don't allow negotiation. Your fill comes from the market maker's quote. However, some brokers have preferential routing that finds better pricing, so comparing brokers can indirectly improve your spreads.

Why is there such a big spread on options expiring in six months?

Long-dated options have more time for the underlying price to move, creating more uncertainty for market makers. They also have lower trading volume because traders prefer contracts closer to expiration. Both factors widen spreads.

How do I know if I got a good fill or a bad one?

Compare your entry price to the midpoint of the bid-ask spread at the moment you placed the order. If you paid within $0.02 of the midpoint on a liquid option, you did well. If you paid $0.10 beyond the midpoint, you overpaid.

Does the spread matter on options I'm planning to hold to expiration?

Yes. If you're holding to expiration and closing the position, you'll exit at a bid price (or exercise if in the money). The spread on entry is a cost that reduces your profit.

What if I enter at the bid instead of the ask?

You're betting on selling first (shorting the option). This is possible but requires a margin account and carries unlimited risk on calls. Most retail traders buy at the ask and sell at the bid.

Summary

The bid-ask spread on options is a direct cost that affects every trade you make. Spreads widen for longer expirations, further out-of-the-money strikes, and less liquid underlying assets. By using limit orders, trading during peak liquidity hours, and focusing on liquid strikes and expirations, you can dramatically reduce this hidden cost. A difference of just $0.05 per contract across 10 trades saves $500 and can be the difference between a profitable year and a break-even one.

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