Capiche: Hit the Bid, Lift the Offer, or Trade In Between

Understanding how to take advantage of spread prices can help you make an informed trading decision. Learn ways to deal with market makers here. Spreads in Stock Trading
2 min read
Photo by Dan Saelinger

When option price penny increments were introduced in 2007, it was a great moment for online traders. The penny increment meant that bid/ask spreads could narrow to $0.01. And narrower bid/ask spreads meant you could try to get an order filled with less slippage, as well as potentially get an execution on the order closer to fair value. Since then, the number of stock options with penny increments has expanded dramatically. But when you look at some options’ bid/ask spreads, they’re still wider than $0.01—sometimes wider than $0.05.

Profits Matter

You see, market makers on any given exchange still create those bid/ask spreads. For equity and index options, they must post bid/ask spreads at which they’re willing to buy or sell options. That obligation is what they get in exchange for making two-sided (i.e., bid and ask) markets. 

If a market maker has to buy an option on the bid price and sell it at the ask price whenever you want to do a trade, she makes the bid/ask spread wide enough to make a theoretical profit when she buys or sells. That’s the market maker’s “edge.” The narrower the bid/ask, usually, the smaller the edge. Which is good for us as self-directed traders. 

Spreads Vary

But a market maker will often hedge that option trade with shares of the underlying stock. If market makers can’t execute their stock hedge because the stock is volatile or illiquid, they’ll widen the option’s bid/ask spread. In other words, if they can’t easily hedge the option trade, they risk losing their edge. So, they build in more edge (i.e., widen out the bid/ask spreads) to give themselves a better chance to make money. 

You might see narrower bid/ask spreads for options on stocks that are actively traded and have narrow bid/ask spreads themselves. Those options may have open interest in the hundreds, or even thousands, so there are potentially lots of participants willing to buy and sell that option. 

That said, when you trade, you want to get the best price—meaning a lower price when you’re trying to buy an option, and a higher price when you’re trying to sell. If you see a narrow bid/ask spread for an option, say, $0.02 or $0.01, you can buy or sell that option and give less edge to the market maker. Combined with high open interest, an option doesn’t get more liquid than that. 

A wide bid/ask spread might signal caution is prudent. For example, if it’s $0.10 or more and has low open interest, you may have a tough time getting filled in between the bid/ask spread, and may have to give the market maker more edge when you do a trade. That increases trading costs above commissions.

Find Your Edge

When open interest is low and bid/ask spreads are wide, you might consider moving on to the next trade. Chances are no one wants to play unless they get an edge for taking your trade. So, take your ball and go play somewhere else.

Call Us

Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Thomas Preston is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top