Bid-Ask Spread

The bid is the highest price a buyer is willing to pay right now. The ask is the lowest price a seller is willing to accept. The bid-ask spread is the gap between them.

If you buy at the ask and then immediately sell at the bid, you lose the spread. It is a real cost of trading, even when there is no commission.

A liquid stock might show a bid of $50.00 and an ask of $50.02, a spread of 2 cents. An option might show a bid of $1.00 and an ask of $1.20. That is a spread of $0.20 per share, or $20 per contract of 100 shares.

The midpoint of that option is $1.10, so the spread is about 18% of its price. Buying at $1.20 and selling right away at $1.00 would cost you $20 per contract before any commission.

Each option contract has fewer buyers and sellers than the stock itself. Spreads tend to be wider on contracts far from the current price, on long-dated options, on low-priced options, and on contracts with little volume or open interest. They can also widen at the open and during fast, news-driven markets.

Options on very popular stocks and ETFs usually have much tighter spreads.

Many traders check the spread before entering, prefer contracts with high volume and open interest, and use limit orders so they control the price instead of accepting whatever the market shows. Some try to trade near the midpoint, though a fill there is not guaranteed.

Strategies with several legs, such as spreads, pay the bid-ask spread on every leg, so the cost adds up.