186 lines
2.9 KiB
Plaintext
186 lines
2.9 KiB
Plaintext
148 • The Intelligent Option Investor
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paragraphs. The easiest way to think of the bid-ask spread is to think in
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terms of buying a new car. If you buy a new car, you pay, let’s say, $20,000.
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This is the ask price. Y ou grab the keys, drive around the block, and
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return to the showroom offering to sell the car back to the dealership. The
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dealership buys it for $18,000. This is the bid price. The bid-ask spread is
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$2,000 in this example.
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Bid-ask spreads are proportionally much larger for options than
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they are for stocks. For example, the options I’ve highlighted here are on
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a very large, important, and very liquid stock. The bid-ask spread on the
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$32-strike call option (which you will learn in the next section is exactly
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ATM) is $0.02 on a midprice of $1.09. This works out to a percentage bid-
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ask spread of 1.8 percent. Compare this with the bid-ask spread on Ora-
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cle’s stock itself, which was $0.01 on a midprice of $31.855—a percentage
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spread of 0.03 percent.
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For smaller, less-liquid stocks, the percentage bid-ask spread is even
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larger. For instance, here is the option chain for Mueller Water (MW A):
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2.5
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5
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7.5
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10
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Last
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C5.30
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C2.80
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0.55
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C0.00
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Change Bid AskI mpl. Bid Vol. Impl. Ask Vol. Impl. Bid Vol. Impl. Ask Vol.Delta
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2.5
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5
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7.5
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10
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2.5
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5
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7.5
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10
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12.5
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DescriptionCall
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Last Change BidA sk Delta
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Put
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C0.00
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C0.00
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C0.25
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C2.25
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C0.00
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C0.00
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C0.55
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C2.35
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C0.00
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C0.10
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C0.85
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C2.55
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C4.80
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5.20 5.50 N/A 340.099% 0.9978
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0.9978
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0.7330
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0.1316
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0.9347
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0.8524
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0.6103
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0.1516
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0.9933
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0.9190
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0.6070
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0.2566
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0.1024
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142.171%
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46.039%
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76.652%
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N/A
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N/A
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2.95
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0.55
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0.10
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0.20
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0.10 N/A
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N/A
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N/A
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0.10
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0.30
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2.35
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40.733%
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N/A
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N/A
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N/A
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N/A
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36.550%
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38.181%
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35.520%
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35.509%
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35.664%
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2.10
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0.50
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0.05
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0.10
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0.60
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2.402.30
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0.05
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0.15
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0.15
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0.85
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2.60
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4.90
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0.70
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2.45
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4.60
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2.70
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0.500.00
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5.20 5.50
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3.00
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0.90
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0.20
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2.80
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0.80
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0.10
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5.505.10
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3.102.85
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1.151.05
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0.400.30
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0.200.05
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39.708%
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N/A
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N/A
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36.722%
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N/A
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38.754%
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38.318%
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39.127%
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36.347%
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36.336%
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292.169% 0.0000
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-0.0000
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-0.2778
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-0.8663
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-0.0616
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-0.1447
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-0.3886
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-0.8447
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-0.0018
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-0.0787
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-0.3890
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-0.7375
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-0.8913
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128.711%
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53.108%
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88.008%
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117.369%
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60.675%
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42.433%
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44.802%
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110.810%
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50.757%
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42.074%
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43.947%
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49.401%
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163.282%
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75.219%
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42.610%
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45.215%
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122.894%
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64.543%
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42.697%
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44.728%
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50.218%
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C5.30
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C2.80
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C0.85
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C0.10
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C5.30
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C1.10
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C0.35
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C0.10
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3.00 +0.15
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AUG 16 ´13
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NOV 15 ´13
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FEB 21 ´14
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Looking at the closest to ATM call options for the November expiration—
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the ones struck at $7.50 and circled in the screenshot—you can see that
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the bid-ask spread is $0.10 on a midprice of $0.85. This works out to 11.8
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percent.
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Because the bid-ask spread is so very large on option contracts,
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round-tripping
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1 an option contract creates a large hurdle that the returns
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of the security must get over before the investor makes any money. In the
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case of Mueller Water, the options one buys would have to change in price
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by 11.8 percent before the investor starts making any money at all. It is for
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this reason that I consider day trading in options and/or using complex |