3309 Drysdale Ct
Edwardsville, IL 62025
How do you folks deal with the (often huge) bid/ask spread on
Options? Sometimes the spread is as big as 40% (!), or 10% on
Options that are getting some regular volume.
Seems like they're run by an automated process that reacts to
the orders you place.
I remember Matt saying that he tries to go one tick past the
mid-range (above when buying, below when selling) but quite often
I've found that just bumps the bid (or ask) to my price and
sometimes even bumps the other end of the range away from me.
After 10-15 minutes, the range often tightens up (and may in
fact fill), but this huge uncertainty in what price I can get a
fill at really makes it tough.
I think it's pretty simple really. I trade credit spreads
on stocks and the SPX and I always use the midpoint to enter and
exit. I always get filled and I never (rarely) chase the
price. I think a lot of traders make it way more complicated than
it has to be.
I look first at the volume and the # of bids on each side and
the open interest - then put in a day bid (if vol of bids is high)
a nickle over the horde. I get filled on at least 1/2; often 5
minutes before the market closes. That's often with the price
of the underlying flat.
Know the upper limit of the premium (extrinsic value) you're
willing to pay and set your limits there. Of course, premium
will change relative to your bid price as the underlying
moves - so, if you don't get filled, you can't leave your order in
place for very long without adjusting it. I almost always use
spreads, so my calculation is a combination of long & short
premium in order to arrive at the total premium I plan to collect
(typically collecting premium vs paying it). For the most
part, I stick to options with much tighter spreads than what you're
Interesting. Unfortunately, this is all within Registered
accounts, so I'm not allowed to sell-to-open any options except
Covered Calls. I can only buy Calls, buy Puts, and sell
It seems like the bid/ask spread widens when I place an order,
hoping to draw me into chasing it. If I adjust my bid price
within a minute or so, the ask will continue to move up, even if
the underlying isn't moving. However, if I do nothing, the
underlying will eventually start moving the bid and ask prices in
tandem with it and if I get lucky, it will move through my bid
price and fill.
This happened to me with VNQ--an ETF that trades almost 6M
shares per day. The option bid/ask spread is currently almost
8% (1.90 - 2.05).
Even on SPY options, I regularly see a bid/ask spread of 2%
Is it because there typically is such a big potential percentage
profit to be made that the market makers know you'll tolerate more
slippage on entry/exit?
Subscribe to our email list for regular free market updates
as well as a chance to get coupons!