Bid-Ask Spreads in Options: How Liquidity Affects Your Trades

When you buy or sell an options contract, you’re not just paying a commission. The biggest cost you might not even see is the bid-ask spread. It’s the gap between what buyers are willing to pay and what sellers want. In stocks, this gap is often pennies. In options, it can be dollars. And that difference can eat into your profits before you even make a trade.

What Exactly Is the Bid-Ask Spread?

The bid is the highest price someone is ready to pay for an options contract. The ask is the lowest price a seller will take. The difference between them? That’s the spread. If an option has a bid of $1.45 and an ask of $1.60, the spread is $0.15. You pay that $0.15 just to get in. If you sell right away, you lose it again. That’s not a commission. That’s a hidden tax built into the price.

Market makers - firms like Citadel Securities and Virtu Financial - set these prices. They’re not charities. They make money on the spread. The wider it is, the more they earn for taking on risk. But that cost gets passed to you, the trader. The Options Clearing Corporation says spreads make up 65-85% of total transaction costs in options, compared to just 30-40% in stocks. That’s because options are more complex, less liquid, and harder to price.

Why Are Some Spreads So Wide?

Not all options are created equal. The spread depends on three big things: liquidity, moneyness, and time.

• Liquidity: SPY and AAPL options trade millions of contracts a day. Their spreads are often $0.01-$0.03. But options on a small-cap stock with 500 trades a day? Spreads can hit $0.50 or more.
• Moneyness: At-the-money options - ones closest to the current stock price - are the most popular. That means tight spreads. Deep out-of-the-money or deep in-the-money options? Fewer buyers. Wider spreads. Some can be over 50% of the option’s price.
• Time to expiration: Weekly options near expiration? High volume. Tight spreads. LEAPS (long-term options) with 1-2 years left? Low volume. Spreads can be 10-20% of the price. One Reddit user reported a $0.80 spread on a $5.00 LEAPS option - that’s a 16% cost just to enter.

During earnings season, spreads explode. The Options Clearing Corporation found they widen 300-500% around earnings announcements. If you’re trading Tesla or NVIDIA before earnings, expect to pay double or triple your normal spread. Pre-market and after-hours? Spreads can jump 100-200%. Stick to regular hours (9:30 AM-4:00 PM ET) if you want fair prices.

How Do Spreads Compare to Stocks?

Think of it this way: Apple stock trades at $180. Its spread? $0.01. That’s 0.006% of the price. Now look at a $2.00 Apple call option with a $0.05 spread. That’s 2.5% - 50 times higher as a percentage. That’s normal. Options are derivatives. Their value depends on volatility, time decay, and the underlying stock’s movement. That complexity means fewer traders, less competition, and wider spreads.

Even the most liquid options aren’t as tight as their underlying stocks. SPY options average $0.02-$0.03 spreads. SPY stock? $0.01. The gap is real. And it’s why retail traders often lose money before they even start - not because they’re wrong on direction, but because they paid too much to get in.

Who Benefits? Who Gets Hurt?

Institutional traders have an edge. They use advanced order routing, direct market access, and high-volume discounts. Their average spreads are 30-50% narrower than retail traders’. That’s not luck. It’s access.

For retail traders, wide spreads are a major barrier. A 2023 OptionStrat survey found 78% of retail traders say bid-ask spreads are their biggest execution problem. Many don’t realize they’re losing money on the spread until they check their trade history. One trader bought a $1.20 call, sold it for $1.25 - thought they made $0.05. But the spread was $0.10. They actually lost $0.05.

Platforms matter too. Interactive Brokers gets 4.6/5 stars for tight spreads. Webull? 3.2/5. Why? IB routes orders to multiple exchanges and market makers. Webull often sends orders to a single market maker, which can lead to worse fills. Your broker’s order routing can cost you more than your commission.

How to Beat the Spread

You can’t eliminate the spread. But you can minimize it.

1. Use limit orders. Never use market orders for options unless you’re trading SPY or AAPL. Place your buy order at the midpoint between bid and ask. If bid is $1.45 and ask is $1.60, try $1.52. You’ll get filled less often, but when you do, you save 30-50% on spread cost.
2. Avoid wide spreads. Don’t trade options with spreads over 5% of the option’s price. If an option costs $1.00 and the spread is $0.06, walk away. That’s 6%. You need the stock to move 6% just to break even.
3. Stick to liquid names. Focus on SPY, QQQ, AAPL, TSLA, NVDA. These have the tightest spreads and deepest markets. Avoid obscure ETFs or small-cap stocks unless you’re prepared to pay the price.
4. Trade during regular hours. Avoid pre-market, after-hours, and the first 15 minutes after open. Spreads are widest then.
5. Check the spread before you click. Look at the Level 2 quote. If the spread is $0.10 or more, pause. Ask yourself: Is this trade worth paying 10% just to get in?

A 2023 QuantConnect study of 10,000 retail traders showed those who used limit orders at the midpoint earned 23% better net returns than those using market orders. Why? Because they paid less for the spread.

The Bigger Picture: Is the Market Getting Better?

Yes - but only for some. Since 2018, average spreads have dropped 35% thanks to AI pricing tools and more electronic market makers. Citadel and Virtu now adjust spreads in real time based on volatility and order flow. That’s good news for SPY and AAPL options.

But here’s the catch: 65% of all options volume happens in contracts with spreads under $0.05. The other 35%? Spreads over $0.10. That’s a two-tiered market. If you trade popular names, you get near-institutional pricing. If you trade anything else, you’re paying a penalty.

Regulators are watching. The SEC is questioning payment for order flow - where brokers sell your orders to market makers. Critics say it hides true spread costs. The Options Clearing Corporation says new price improvement rules starting in Q1 2024 will cut spreads another 5-10%. But that won’t help you if you’re trading a $0.30 option with a $0.25 spread.

By 2026, analysts predict spreads will drop another 25% - but only on the most liquid contracts. The gap between big and small options will likely grow wider, not narrower.

Final Reality Check

Most retail traders focus on direction: "Will the stock go up or down?" But the real battle is about execution. You can be 100% right on the stock’s move and still lose money because you paid too much in spread.

Successful options traders don’t just pick winners. They pick contracts with tight spreads. They avoid the traps. They use limit orders. They know when to wait. And they never assume the price on their screen is the price they’ll get.

If you’re trading options, treat the bid-ask spread like a tax. You can’t avoid it. But you can minimize it. Do that, and you’re already ahead of 80% of retail traders.