Why is that? if options had reasonable spread they would be a great way to obtain leverage, but you really can't trade these damn things because of the spreads/
First, trading options is a viable form of serious income. Yes, you can trade options but you need to be careful what you trade. If you want to, trade the overall market options (QQQQ, SPY). These are as liquid as options get and provide reasonable spreads. Second, the spreads are huge because the risk for the market maker is huge. Consider HWAY the other day, $35 Puts went up over 2000% and somebody had to foot that bill. The spreads are necessary so the MM doesn't get blown out of the market when one stock moves against him.
Nah, the reason is = no electronic matching platform for options yet. MMs can only live with wide spreads. To reduce the spreads you need to eliminate MMs.
In my early days of my trading evolution, I worked extensively with options. Over that time particular 2 year time frame, it was very difficult to make gains on a level of consistency I required. Many losses with only a few huge gains on specific trades made it too erratic for me. One of the main obstacles were the spreads. I crunched a lot of numbers and found that spreads averaged about 7-9% of the price of the contract. So... even when I would try to battle the market makers and get a buy price inside the spread, I would instantly be down 5-7% on each position the second I bought the contract (or sold naked.) Options contracts are just not a liquid enough instrument to warrant tighter spreads.
Perhaps if you are getting raped by options market makers, the best plan is to become an options market maker yourself. Just get the license and rent a badge. Now you will be the one making outrageous profits off the spread. Sweet.
The market makers are liquidity providers and their edge is totally different to retail traders. Their edge is very small, and they have to manage their risk. Their risk is reflected in those spreads. We cannot change this, and the best thing we can do is to focus on ways to minimise our exposure to wide spreads by developing trading logic. To obtain reasonable spreads, trade only a universe of stocks that have options with very high liquidity instead of trading every stock that is optionable. You can start with those "penny increment priced options", and add to the list other major cap stocks/etfs. Don't buy very deep in the money options, because that's where market makers will widen the spread even on the most liquid options. Use strategies where the spread won't be an issue. If the options you own go very deep in the money and you become a victim of your own success, you can use synthetics to get out of trades to avoid the spread. However this can tie up your capital.
There are so few independent market makers left on the equity options floors and there are not any people looking to go down their and try. When youâre an mm you donât pick and choose what you want to trade and when, you have to provide liquidity in all of the series in the books youâre signed into. The expense involved in market making is not small either. If you leased a seat on an exchange youâre looking at covering somewhere between 5 and 8 grand a month in fixed costs, plus variable fees. If you look a the spreads in the most popular 300 or so optionable stocks youâll see that for the most part the spreads are very slim and in many cases just a couple pennies wide. Oh and by the way thatâs not even getting into the commissions on the stock youâd have to trade and all the payment for order flow deals youâd get shut out of since you have no relationships established. Whatâs left on the equity options floors are huge firms willing to do big volume for tiny edge. Most of the stuff is streamed in electronically and managed from off the floor. By the way youâre currently subject to the NBBO since youâre a retail trader and essentially thatâs a matching system.