The Bid-Ask Spread: What It Costs on Every Options Contract

The cost that does not appear on your statement

Commissions are visible. You see the figure, you can compare brokers, you can total it at year end.

The spread is invisible in exactly the same way a poor exchange rate is invisible. Nothing is itemised. You simply get a slightly worse price than the one on screen, on every contract, in both directions, and it never appears as a line you could add up.

For a strategy built on collecting modest premiums repeatedly, this is not a detail. It can be a larger drag than commissions by a wide margin.

What the two prices mean

Every options contract shows two quotes.

The bid is the highest price anyone is currently willing to pay. It is what you receive if you sell right now.

The ask is the lowest price anyone is willing to accept. It is what you pay if you buy right now.

The ask is always higher. The gap between them is the spread, and it is the market maker's compensation for standing ready to trade with you at any moment.

A contract quoted 1.15 / 1.35 has a bid of $1.15, an ask of $1.35 and a spread of $0.20 — $20 on a contract. The "price" you see quoted elsewhere is usually the mid, $1.25, and the mid is a convenient average at which nobody is obliged to trade with you.

Why options spreads are so much wider than share spreads

A liquid share might quote a spread of one cent on a $50 stock — two hundredths of one percent. An option on that same stock can easily show a spread of 10% of its own price or more.

Three reasons, and they compound.

Fragmentation. One stock has one order book. That same stock has options across many strikes and many expirations, each a separate instrument with its own book. The same total interest is divided across hundreds of contracts, so each is thinner.

The market maker is carrying real risk. Quoting both sides of an option means taking a position whose value depends on the underlying price, volatility, and time. Hedging that is continuous work with its own costs. The spread pays for it.

Uncertainty widens it. Ahead of earnings, in a volatile market, or on a name nobody follows, the maker's own uncertainty about fair value increases and the quote widens to match.

The practical consequence: spread quality varies enormously between contracts that otherwise look similar, and it is not correlated with how rich the premium appears.

Measuring it properly

The absolute spread is nearly meaningless. $0.20 is trivial on a $6.00 contract and severe on a $0.60 one. Measure it as a proportion:

Spread % = (ask − bid) / mid × 100

A contract quoted 1.15 / 1.35 has a mid of 1.25 and a spread of 16%. That is wide. A contract quoted 1.24 / 1.26 has a spread of 1.6%, which is tight.

Two things make this worse than it first appears.

You may pay it twice. Sell at the bid, and if you later buy the contract back to close, you pay the ask. Both halves of a round trip cross the spread. A 16% spread paid twice is a substantial share of the premium you were collecting.

It is worst when you most need it. A wide market is a market with few participants, and few participants is exactly the condition you meet when you want out in a hurry. The spread you measured on a calm Tuesday is not the spread you will face on the morning the position turns against you.

For a seller holding to expiration this softens considerably — a contract that expires worthless never crosses the spread a second time, which is one of the underrated advantages of a hold-to-expiry approach. But it only softens if holding is genuinely your plan and not merely your intention.

What the spread is telling you

Beyond its direct cost, a wide spread is information.

It says few people are trading this contract. That usually means low open interest, and low open interest means that if you need to act, there may be nobody to act with. The spread is the visible symptom; the illiquidity is the condition.

It also makes the premium harder to trust. A contract showing a mid-price premium of $1.25 when the actual bid is $1.15 is not paying $1.25. Screens and screeners frequently rank on the mid, which systematically flatters illiquid contracts — the wider the spread, the more the mid overstates what you would actually receive. A "rich" contract found by a mid-price screen is sometimes just a wide one.

Working with it

Quote the bid, not the mid, when you evaluate. If the contract is not worth selling at the bid, it is not worth selling. Anything better is a bonus.

Try a limit order between mid and bid. For a reasonably liquid contract, resting an order slightly above the bid is often filled. This is not free money, but on a wide spread the improvement is real and repeatable.

A market order on a wide contract accepts whatever is there. On a thin book that can fill considerably worse than the displayed bid, which is why the spread is a cost rather than a cosmetic detail.

Treat spread percentage as a filter, not a tiebreaker. A contract whose spread consumes a meaningful slice of its premium has already given back much of what made it interesting. Screen it out before you compare it to anything.

Check it again near the event. Spreads widen into earnings and in volatile conditions. A contract measured last week may be quoting quite differently today.

How StratosIQ handles it

Liquidity is a publication requirement, not a scoring nicety. Contracts must clear a minimum open interest and sit within a spread ceiling before they are scored at all — a contract that fails those does not appear, however its premium looks.

This is a deliberate choice to publish fewer contracts. Loosening the liquidity requirements would produce a longer list every morning, and the additions would be precisely the contracts a seller could not reliably exit. It also has a useful side effect: the thinly traded, distressed names where corporate actions concentrate tend to be excluded as a by-product of demanding tradeable contracts.

Every contract is scored on the basis that it runs to expiration, which is the assumption under which the spread is paid once rather than twice.

The full published record, contract by contract and including every loss, is on the performance page.

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