Core Concepts
Understanding Bid-Ask Spreads
Learn what the bid-ask spread is, why it matters when selling options, and how a wide spread can quietly eat into your premium income.
What Is the Bid-Ask Spread?
The bid is the highest price a buyer is currently willing to pay for an option. The ask (or offer) is the lowest price a seller is currently willing to accept.
The spread is simply the difference between those two prices.
Simple definition
Bid-ask spread = Ask price − Bid price. It is the built-in cost of trading that particular contract right now.
Why the Spread Matters for Option Sellers
When you sell an option (cash-secured put or covered call), you usually sell near the bid. When you later buy it back to close, you usually buy near the ask.
That means you pay the spread once on the way in and once on the way out. A wide spread is real money that never shows up in a simple mid-price calculator.
Tight Spread Example
Bid $1.50 / Ask $1.55
Spread = $0.05 (about 3% of premium)
Wide Spread Example
Bid $1.50 / Ask $1.80
Spread = $0.30 (20% of premium)
How a Wide Spread Eats Returns
Suppose you sell a put at the mid-price of $1.65. Your calculator shows a nice return. But if the real bid is only $1.50, you actually receive less premium than the mid-price suggested.
If you later need to buy the option back and the ask is $1.80, your round-trip cost is $0.30 per share — $30 per contract — before any market move.
Rule of thumb
If the spread is more than about 10% of the premium, liquidity is thin and the trade is usually more expensive than it looks.
What to Look For in the Option Chain
- Prefer underlyings with tight spreads (high volume, popular ETFs and large-cap stocks).
- Check both the put and call spreads at the strike you are considering.
- Use limit orders near the mid-price instead of market orders when possible.
- Remember that calculator results based on mid-price are optimistic — real fills are usually worse.
Spreads and Your OptionEdge Calculators
The OptionEdge calculators use the numbers you enter. If you type the mid-price, the return on capital looks better than what you will actually receive or pay when the spread is wide.
Always glance at the bid and ask in your broker before deciding a trade looks good on paper.
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