Lesson

Bid/ask reality check | Options Educator

Preview slippage in thin names and practice walking quotes toward the mid.

What you'll practice

  • Your buy limit starts at the ask, where a market order buys. Walk it toward the mid until the slippage against the mid is within $0.05 a share.
  • Predict: you lower your limit by one step. What happens to the whole order's slippage against the mid?
  • If you bought at your limit and sold straight back at the bid, you would give up part of the spread. Find the limit where that comes to $150.00 on this order, half of what buying at the ask gives up.

In this lesson

Understanding Bid and Ask

  • Bid = buying price, Ask = selling price
  • Spread is the cost of immediate execution
  • High volume = tight spreads
  • Market makers profit from the spread

Options Spreads: The Hidden Cost

  • Option spreads are much wider than stock spreads
  • The spread is an immediate cost you must overcome
  • High open interest = tighter spreads
  • Trade liquid options to minimize spread cost

Working Orders: Getting Better Fills

  • Always use limit orders for options
  • Start at mid-price and walk toward the ask
  • Patience saves money on every trade
  • Wide spreads require more negotiation

Slippage and Execution Quality

  • Slippage = how much worse your fill is than expected (buying: actual - expected; selling: expected - actual)
  • Round-trip slippage can eat 30-60% of profits
  • Trade liquid options during optimal hours
  • Always use limit orders and walk the spread

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