What Is The Bid-Ask Spread In Options Trading?

What is the bid-ask spread in options trading?

You may not realize it, but every single options trade has a "silent tax" that quietly eats away at your profits. This episode of the Options Trading Podcast does a deep dive into the bid-ask spread, unpacking what it is, why it exists, and, most importantly, how it costs you money. Learn the foundational mechanics of the bid (highest buyer price) and the ask (lowest seller price), and how the gap between them is pure profit for market makers. We share crucial strategies on how to use limit orders and avoid widespread contracts to prevent this hidden tax from draining your account, even on winning trades.

Don't let market mechanics blindly rob you of your gains. Tune in to understand this core concept, and then ask yourself: What other overlooked frictions might be quietly draining your resources in your life or trading? Hit subscribe so you don't miss our next breakdown of complex topics!

Key Takeaways

• Definition and Cost: The bid-ask spread is the difference between the highest price a buyer is willing to pay (Bid) and the lowest price a seller is willing to accept (Ask). This difference is a hidden cost, a "silent tax," that traders pay, which directly reduces profits.
• The Market Maker's Role: Market makers create liquidity by always being ready to buy or sell. They profit by buying at the lower Bid and selling at the higher Ask, pocketing the spread as compensation for their risk and service.
• Factors Influencing Spread Width: Spreads are tighter on highly liquid options (high volume/open interest, like on SPY or QQQ) and tend to widen during periods of high volatility or on obscure, thinly traded options.
• Crucial Strategy: Use Limit Orders: To avoid paying the full spread, never use market orders for options. Always use a limit order and "work the order" by placing it inside the spread, perhaps near the midpoint, to attempt to get a better fill price.
• Cumulative Impact: Even a small spread (e.g., $0.20) on 10 contracts can equate to a significant loss ($400 on a round trip) that can wipe out a majority of your potential profit, highlighting that the spread always matters.

"You got the move right, but the spread killed them."

Timestamped Summary

0:16 – Introduction to the Silent Tax: The bid-ask spread is introduced as a "silent tax," a hidden friction in options trading that most traders fail to recognize, but which adds up to a huge impact on profits.

1:44 – Defining the Spread Mechanics: Clear definitions are given: the Bid is the highest price any buyer is willing to pay, and the Ask is the lowest price any seller is willing to accept. The gap between them is the spread, where the "hidden tax" lives.

2:26 – Quantifying the Instant Loss: An example demonstrates the cost: if you buy at the $1.20 Ask and immediately sell at the $1.00 Bid, you lose $0.20 per contract, equating to $20 per contract lost instantly, before the stock even moves.

3:31 – The Market Maker's Profit Engine: The spread exists because market makers provide liquidity (always standing ready to buy or sell). They pocket the spread (buying low at the Bid, selling high at the Ask) as compensation for their service and risk.

5:44 – Factors Influencing Spread Width: Key factors are discussed: high liquidity (high volume/open interest) leads to tighter spreads, while high volatility leads to wider spreads (more risk for market makers). Traders must avoid thinly traded, illiquid options.

7:48 – The Impact on Winning Trades: A strong example show

Support the show