THE OPTIONS COURSE- BID-ASK SPREAD: A CLOSER LOOK
THE OPTIONS COURSE BID-ASK SPREAD: A CLOSER LOOK From the first moment we are exposed to a real options quote, we realize that options do not trade at just one price. There is a bid price and an ask (or offer) price. For example, the Cisco (CSCO) October 20 calls do not trade for 55 cents. Instead, you may see a quote similar to this: CSCO 22.50 Calls: .50–.60. In this example of the CSCO 22.50 calls, $.50 is the bid and $.60 is the ask (or offer). That means that everyone who is interested in selling CSCO 22.50 calls can do so at $.50 and all interested buyers of CSCO 22.50 calls can own them for $.60. Since we are not market makers, in order to guar antee ourselves a fill, we must pay the ask and sell the bid. To illustrate the meaning of these two prices, imagine walking into a car dealership. A dealer has two prices on a car. There is a dealer invoice and a sticker price. A car dealer is willing to buy cars for dealer invoice, and is happy when they’r