Options Pricing: Bid-Ask Spread
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Put and call options provide several ways to hedge, speculate or generate passive income. We have written about many of those in the past. No matter what options strategy you use though, there is one factor that must always be taken into consideration. That is the bid-ask spread on the option prices. Think of a used-car lot. He stands willing to buy a car from anyone who wishes to sell or trade one in.
For any particular car that is offered to him, he decides what he is willing to pay. That is his bid. If you want to sell the car to him for that price, you can turn over the keys and collect your check. If you do sell the car to the dealer, he will then offer that car for sale to customers. He will ask a higher price. Bid and ask option trading statements are true. He provides services to both buyer and seller, and the markup is his bid and ask option trading for doing so. He makes it convenient and fast for both buyers and sellers to do what they need to.
Their alternative would be to attempt on their own to find a party to deal with at the exact time that they need to make it happen. This is a time-consuming and uncertain process. The same is true if we are the used car buyer. The lower a sale price we can negotiate, the better off we are.
It may be accepted, or not. And so on until we settle bid and ask option trading a price that both parties are willing to agree to. What the dealer will agree to depends on how badly he needs to do that particular deal today, and on how much competition he has. What applies to used-car prices also applies to option prices. Our order will go through if the option dealer market maker is hungry enough. If not, it will remain unfilled.
We are then free to cancel that order and try again at a slightly different price. This is bid and ask option trading modest.
Even if we had to pay it all by buying at the ask and then selling at the bidthat was not a huge difference. This is because many traders of all types buy and sell options on SPY. In contrast, look at the options below for a slightly different exchange-traded fund.
Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels bid and ask option trading risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.
The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.