Thursday, December 15th, 2016

Large Bid/Ask spreads in stock options and trading them?

When the bid / ask in a very large choice, what is the best strategy when placing an order? What factors should be considered before placing? And how does one place an order fill and get an optimal price between the bid / ask?

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4 Responses to “Large Bid/Ask spreads in stock options and trading them?”
  1. zman492 says:

    A lot of people would simply tell you the best strategy is to avoid trading options that have a large bid/ask spread. Even if you can open a position for a favorable price there is no guarantee you can close it for one.

    Obviously you want to use a limit order. You do not have much chance of getting a fill if your limit price is half way between the bid and the ask but it can happen. I normally try giving the market maker a little over half the spread and still frequently will not get a fill.

    From my experience it appears you have a better chance of getting a better fill is you are entering a spread order.

    You can try putting in an order that is the minimum increment above the bid quote (if you are trying to buy) or that is the minimum increment below the ask quote (if you are trying to sell); sometimes you will get lucky and get a fill. (For most options the minimum increment is five cents for an option selling below $3.00 per share or ten cents for an option over $3.00.)

    If this does not sound like a good answer I guess it is because I do not think there is a very good answer to your question. If the spread is too large and you insist on trading that option you are unlikely to get the optimal price.

  2. Alex says:

    I agree with zman. There’s no single recipe for getting filled. There are just too many variables (market direction, order flow direction, market maker’s inventory/position, whether it is a spread order or not and etc.), which sometimes work in your favor and sometimes don’t.

    I’d say it is as much an art as it is a science. 🙂

  3. raysor says:

    In the UK most option prices are indicative, maybe this is the same in US.
    I always put a limit on the bid if I am buying and on the offer if selling. It depends what you think the option is worth and what level you are prepared to deal at (and how desperate you are to deal). The prices displayed are not ‘real’ or at least you need to know the size.

  4. Usually you can avoid these big gaps by choosing stocks and indicies with a lot of volume. When these still have a large difference between bid and ask, I’d just stay clear. Be sure to check front month vs further out months for different strategies. Generally there is more volume in the front month.

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