How the spread costs you
A market buy order fills at the ask, and a market sell order at the bid. Buying and selling straight away loses the spread.
What makes spreads wider
- Low liquidity: fewer buyers and sellers, as in far out-of-the-money options and many stock options.
- High volatility: market makers widen quotes when prices move fast, such as around results or the open.
- Time of day: spreads are often wider in the first minutes after 9:15 and near the close.
- Distance from the money: at-the-money options usually have the tightest spreads.
How to reduce the cost
- Use limit orders at or near the midpoint instead of market orders.
- Trade liquid contracts: near-month, near-the-money options and index futures.
- Avoid the first minutes of the session if the spread is wide.
- Check the spread before entering, especially for multi-leg strategies, where four legs mean four spreads.
Spread and slippage
The spread is the visible cost. Slippage is the difference between the price you expect and the price you get, which includes the spread and any further move while your order fills. Large orders can also move through several price levels in the market depth.
Related terms
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Frequently asked questions
What is a good bid-ask spread?
For liquid index options, a few paise to a rupee near the money. As a rule, a spread under 1% of the option's price is tight.
Why is the spread wide on some options?
Few traders quote prices in them, usually because they are far from the money, far from expiry or on less traded stocks.
Should I use market orders for options?
In liquid contracts, a market order fills close to the quote. In thin contracts, use a limit order to avoid filling far from fair value.
Does the spread affect backtests?
Yes. A backtest that fills at the last traded price ignores the spread and overstates results. See backtesting mistakes.