Every option has two prices at any time of the trading day.
The first price is called the “bid” or sell price, and is the price at which you, or someone else, could sell the option. If you had purchased a call option two weeks ago, and were now ready to sell it back for a profit, you would look at the bid price.
The second price is the “ask,” or buy price. That is the price at which you can buy an option. Let’s say you wanted to buy a put on Google (GOOG) today, and wanted to know what option investors were paying for that put right now. You would simply look at the ask price. The ask price is always higher than the bid price.
The difference between the bid and ask price is the “spread.” Imagine that the current ask price for a put is $1.00 per share, and the current bid price is $.90 per share. In this case the spread is $.10.
Ask Price:$1.00 per share
- Bid Price:$.90
= Spread:$.10
What this means to you, is that when you buy the option you immediately incur a small loss because you paid $1.00 and can currently only sell it for $.90 a share. So you need the option to appreciate in value before you can get to a breakeven point and then profitability. The spread is a major component of trading costs.
In this video we will talk about some simple rules and ideas for minimizing the effect of the spread. This will include a discussion about the advantages of longer term investing, and how to find options with $.01 penny spreads.
