Option liquidity and bid-ask spreads
Wide option spreads are a hidden cost that can exceed commissions many times over.
Options risk. Long options can lose 100% of the premium; short options can lose far more and may be assigned early. Examples use synthetic prices and the common 100-share multiplier — check actual contract terms.
Checking liquidity
Look at the bid-ask spread relative to the mid price, daily volume and open interest (contracts outstanding). Spreads of a few percent of mid are common in liquid names; far strikes and thin underlyings can have spreads of 20%+.
Limit orders near the mid help, but there is no guarantee of a fill. Market orders in illiquid options can be costly.
Worked example
The cost of crossing the spread (synthetic)
- Quote: bid 1.20 / ask 1.50. Mid = 1.35; spread = 0.30 (22% of mid).
- Buying 5 contracts at the ask and selling immediately at the bid loses 0.30 × 100 × 5 = $150.
- The option must rise more than 0.30 just to break even on a round trip at market.
Check the spread before you check the Greeks.
Common misconceptions
“The last traded price is what I'll get.”
You buy near the ask and sell near the bid; the last trade may be stale.
“Open interest shows whether people are bullish.”
It counts open contracts; every contract has both a buyer and a seller.
Checkpoint