Filtering option trades by bid-ask width

The bid-ask as an immediate charge

A quoted bid-ask difference on a stock, exchange-traded fund, or option can be treated as an immediate transacting cost. That bid-ask spread is the displayed gap between bid and ask, and it is the charge for crossing the market.

A newly purchased long must recover this implementation cost, before commissions, just to get back to even. The option premium is the quoted contract price. A long needs this price to rise by more than the spread before the position can show a gain.

Recovering a 0.10 entry gap

An August-dated 40-strike call shown at 2.00 bid and 2.10 ask has a 0.10 width. That width equals 10 dollars per standard contract if the call is bought at the offer and sold at once at the bid.

Offsetting that 0.10 entry gap requires the bid to reach 2.10. A later 2.10 by 2.18 quote is presented as a breakeven exit when commissions and fees are ignored.

A nickel filter on quote width

A 0.05 ceiling on quote width is used as a screen so that the transacting cost stays small. That nickel filter is the maximum width allowed under this workflow.

Tightness first, then other liquidity clues

Quote tightness is treated as the leading liquidity clue. Open interest and traded volume are recognized as additional but secondary clues. Liquidity here means ease of entering and exiting near the touch, judged first by quote tightness and only secondarily by volume or open interest.

Underlyings with deeper cash-market liquidity are described as usually supporting tighter option markets.

Nickel markets and wide biotechnology quotes

Call quotes on a highly liquid large-cap name are shown with widths near 0.05. A buy limit placed inside the market, an in-spread order, is described as often fillable within that nickel band.

A less liquid biotechnology name is shown with a 0.45 option width. Similarly wide markets are characterized as common among biotechnology and pharmaceutical underlyings.