Looking at an option call spread with decent metrics but I don't know what is a good percentage spread in Bid/Ask to follow. In this example buying, B/A is $4.60 and $4.15 or a spread of $0.45, (0.45 / 4.15) x 100 = 10.84% to buy and, Selling B/A is $3.20 and $3.65 also a spread of $0.45 (0.45 / 3.65) x 100 = 12.33% to sell Is there a general recommendation of a percentage to keep B/A within? Under 10%? A Google search returns lots of info on how to calculate but no opinions on what the spread percentage should be kept under. Thanks everyone.
IMHO: Best answer would be "It depends". If have your strategy nailed down, that should provide the first consideration, then consider dependencies based on term and on underlying (not necessarily in that order). Beware that the B/A spread after normal trading should not be part of the equation (it invalidates a more focused approach). Overtime if trading limited number of underlying, you should get a better feel of what would be acceptable to you (per underlying) after also observing the typical slippage. Sometimes, the slippage is less than the B/A spread would suggest. -- I have not considered observing by percentage as you mention, which may have merit. I hope you post back if you get some useful supporting data.
You could "dick" around and compute how many vol points the bid ask spread,or how it relates to Delta,but lets keep it non greek.. What you should be asking yourself is what percent of potential profits/expected return does the bid offer spread represent and is it a non starter...Would you play a game where the cost of admission is 5%?..10%?? 20%% You need to present more info,assuming you have come up with a risk reward scenario..All you have told us is you want to buy an option that is 4.15 bid at 4.60...Are you going to stop yourself out if wrong or let the option go to zero? Where would you sell the option on the upside.or would you simply let the option cash out on expiration?? Tell me what you risk reward scenario is assume you are right half the time,and then decide if the spread is a reasonable percentage of your expected return..