Education Lesson 18
Bid And Ask Spreads
In this chapter, you will learn about bid price, ask price and spreads. LESSON- Bid and Ask spreads
Ever wondered why you buy a contract and look at your portfolio and the option starts off at a negative P/L- profit/loss?
Well, you may be overpaying for your contract. Ask yourself, would you pay $10 extra to skip a line at the grocery store to buy a $2 gallon of milk? Unlikely right?
Please see attached picture for an example of what to be careful for when choosing your premium price. Notice the difference between the bid price and ask price.
You may be overpaying when you automatically select the ask price. So always double check the spread to see if thay strike is worth it!
The "bid" price refers to the highest price a buyer will pay per contract.
The "ask" price refers to the lowest price a seller will accept per contract.
The difference between these two prices is known as the spread; the smaller the spread, the greater the liquidity of your contract. Meaning, how fast your contract will be filled. Do you see $16 strike. bid is $.35 and the ask is $1.70? That's a spread of $1.35 which equals $135 per contract. If you dont pay attention and buy the Ask price, you will be paying $135 more than what averge buyer/sellers are buying for.
Yes, you're option was filled immediately but now you're options contract is immediately down 10% or even more.
Now look at the $17 strike. The spread there is $.15. or $15. Sounds more reasonable right? You're not getting ripped off. It's okay to be willing to pay the higher price in order to get your contract filled right away but make sure it makes sense. If not, wall away and dont risk it.
1. Choose stocks that have high volume and are very popular. Liquidity will be higher and spreads will be smaller.
2. Always choose the bid price, few cents above the bid price and if the spread is not so wide, choose mid price.
3. Never fomo into a contract, make the seller lower their ask price and sell to you at the price you asked for. Think of this as negotiating for a house or car. You're essentially making a deal with the other trader.
Good luck and hope this helps. If you have any questions and comments, post them here
Heres some videos to help you further understand.