Large Bid/ask Spreads In Stock Options And Trading Them?
Thursday, January 7th, 2010 at
5:58 am
When the Bid/Ask spread in an option is very large, what is the best strategy when placing an order? What factors should be considered before placing it? And how should one place an order to get filled and get an optimal price in between the Bid/Ask spread?
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Tagged with: Bid/ask • Large • options • Spreads • Stock • them • Trading
Filed under: Stock Trading Strategies
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I agree with zman. There’s no single recipe for getting filled. There are just too many variables (market direction, order flow direction, market maker’s inventory/position, whether it is a spread order or not and etc. ), which sometimes work in your favor and sometimes don’t.
I’d say it is as much an art as it is a science.
A lot of people would simply tell you the best strategy is to avoid trading options that have a large bid/ask spread. Even if you can open a position for a favorable price there is no guarantee you can close it for one.
Obviously you want to use a limit order. You do not have much chance of getting a fill if your limit price is half way between the bid and the ask but it can happen. I normally try giving the market maker a little over half the spread and still frequently will not get a fill.
From my experience it appears you have a better chance of getting a better fill is you are entering a spread order.
You can try putting in an order that is the minimum increment above the bid quote (if you are trying to buy) or that is the minimum increment below the ask quote (if you are trying to sell); sometimes you will get lucky and get a fill. (For most options the minimum increment is five cents for an option selling below $3. 00 per share or ten cents for an option over $3. 00. )
If this does not sound like a good answer I guess it is because I do not think there is a very good answer to your question. If the spread is too large and you insist on trading that option you are unlikely to get the optimal price.
In the UK most option prices are indicative, maybe this is the same in US.
I always put a limit on the bid if I am buying and on the offer if selling. It depends what you think the option is worth and what level you are prepared to deal at (and how desperate you are to deal). The prices displayed are not ‘real’ or at least you need to know the size.