The Bid/Ask Spread with Options

When people trade stocks and ETFs, the bid/ask spread is usually pretty tight. If its a heavily traded one, it can be as low as 1 cent. This spread is what you the buyer pays to get in and out of a trade to the market maker. This is in addition to the fee your broker charges. When trading options the bid/ask spread can get really wide on light volume optionable stocks. This means you will pay more to buy and then sell an option later and this can seriously eat into profits.

For example: right now the bid/ask spread on the QQQQ is 1 to 2 cents. To buy a call is .99 and to sell it is .98. So in this example the bid/ask spread is about 1% of your trade excluding commissions. Not bad huh?

Next Example: Toyota (TM), right now the bid/ask spread on TM is about 9 cents. To buy a call is .91 and to sell it is .83. So in this case the bid/ask spread is about 10% of the trade.

You really need to pay attention to the bid/ask spread and the option price to make sure you you're not killing your profit with this tax. In the Think Or Swim platform, which I use and love, there is a public Penny Increment Stock list which only includes about 250 stocks and ETFS. (Only!?, that's still alot) I've actually gone through each one and narrowed it down to just over 100 taking into consideration volume and open interest. I will post this list in a future post but I wanted to plant this seed on how to save you some serious bling when look for stocks with options.
Later.