I know a lot of things can affect an options price and cause the spread between the bid and ask to get quite wide in relation to the last. But what should a smart options trader do when he's interested in taking an option position on an underlying stock and is confronted with a wide spread between the bid and ask? I'm fully aware of splitting the difference and entering a limit order. But in the past this has rarely led to positive results. So I'm basically asking for some signs to look for or advice from experienced option traders on what to consider before placing trades when the spread is very wide. For example I recently took a position in WFR which had a spread of .20 and did well, buying an ITM option with a bid @ 8.30 and ask @ 8.50. Sold a day later for 9.40. WFR is about a $90 stock. Today I was mildly interested in taking a position in MICC. Taking a look at the ITM Jan 115 call the spread between the b/a is $1.40 wide, Bid = 7.40 Ask = 8.80. I usually like to trade 10 contracts but with a 1.40 spread that's a tough one to deal with. Would appreciate your thoughts, suggestions, advice on how to handle these wide spread situations. Thanks guys
it's not as simple as splitting the difference: it's splitting the difference and adding something if you want to buy, and splitting the difference and subtracting something if you want to sell. A market maker only buys or sells if there is some profit compared to theoretical prices for him.
There is not much you can do in that one. Its listed on 6 exchanges but there is so little order flow in it there is no incentive for anyone to make tighter markets. You can try splitting the markets and waiting till the stock moves against your order a bit. I doubt there are any more then 1 or 2 people watching the markets in that name at any of the 6 exchanges. They've just set their vols and spread parameters and let the computers just move the markets with the stock. You're going to have to give some edge to the mm/specialist for him to be interested in filling you.
Use limit and stick a reasonable bid in and see if someone will bite. Sometimes it will get filled if you are lucky.
Well Dipper, I think you just helped me to understand why the spread is so wide; little order flow. It makes sense then that the spread is wide between the bid and ask since there's not much volume. I do understand that if I want a fill it has a better chance if I add a little incentive to the bid/ask mean. But when looking at taking an option position in any underlying instrument, would it be wise to just pass taking such a position when I find wide b/a spreads and light volume in the options of the underlying, especially the front month ITM call?
Stay away? It depends on your strategy, if you are expecting to get a small movement, the spread may eat most, or all, of your profits.
If it were me I would not bother trying to trade MICC options with those spreads. The stock is very very thin and the options are a mile wide. Dont forget even if you cross that huge spread to open the trade its not going to be any tighter trying to close it.
Well I'm more of a 1 to 3 day swing type trader and small movements of a point or two are usually the targets I seek, and even smaller movements if the underlying moves against me to exit the position at a loss. So it seems the answer is yes, stay away, especially for the type of trading I do. If taking a longer term position then the wide spreads would seem to have less of an impact. At least that's the idea you guys seem to be relaying.
Trade liquid assets. Stay the hell away from wide bid and asks. I stopped trading SPX condors they has $2.00 wide bid and ask and they won't split either. Just avoid the scene, there are lots of other ways to make money.
Thank you, excellent advice. I agree, why fight a 1.40 or a 2.00 spread. Trading is hard enough without putting yourself in a deep hole right from the start. So far the consensus is Stay Away!