Spread Limits?

Discussion in 'Options' started by MYDemaray, Sep 25, 2003.

  1. Are there imposed restrictions on how wide the bid/ask can be? If so, what are they? Is it likely that a market maker could be violating those limits (in a thinly traded option)?

  2. vega


    Even if an option is thinly traded, the MMs have limitations as to how wide their markets can be. Things like this ARE monitored by the exchanges. The only times that a MM has no restriction on how wide the spread can be is when the stock is in a fast market trading condition. I'm not sure, but you may be able to find some more information on the CBOE website, which is www.cboe.com. Hope this helps

  3. Thanks Vega,

    From the ISE -- which says that these rules are similar to other exchanges (easiest info I could find):

    The maximum spread for normal equity options may be no more than:

    • ¼ of a point where the bid is less that $2;
    • 3/8 of a point where the bid is at least $2 but does not exceed $5;
    • ½ of a point where the bid is more than $5 but does not exceed $10;
    • ¾ of a point where the bid is more than $10 but does not exceed $20; and
    • $1 when the bid is $20 or greater.

    The Bid/Ask differentials stated above shall not apply to in-the-money optionsseries where the underlying securities market is wider than the differentials setforth above. For these series, the Bid/Ask differential may be as wide as thequotation on the primary market of the underlying security.

    Additionally, the ISE has established the following policy with regard to Bid/Askspread differentials in LEAPS options:

    • For LEAPS options with one year or less to expiration, the maximumBid/Ask spread differential shall be the same as provided for standard equityoptions.
    • For LEAPS options with more than one year to expiration, the maximumBid/Ask spread differential shall be no greater than twice the maximumprovided for standard equity options, except that options priced at $1 or lessmay be no wider than 3/8 of a point.
    • In no event may the Bid/Ask differential for a LEAPS option be greater than$1 wide.
  4. vega


    They sound identical to what I remember when I took the membership class at the CBOE a few years ago. Was there something that looked too wide that made you start this thread originally? Like I said before, the exchanges monitor this stuff, and generally all the quotes are generated electronically (aka auto-quote) by the DPM (designated primary market-maker) and their programs should be taking the limits into consideration. Glad you found the link. Good luck