loader image

How Wide Is Too Wide? A Closer Look at the Bid-Ask Spread

by | Feb 23, 2022 | Options

With all the headlines we’re seeing from Eastern Europe, not to mention talk of rising interest rates, volatility is shaking up the markets… making it hard for traders to lock in consistent gains.

That’s why now — more than ever before — it’s important to consider what makes any given trade a good play so you can increase the odds of locking in a winner.

So I wanted to take some time to elaborate on a question I received in the Daily Profits War Room: How wide a spread is good to play, or is it dependent on the cost of the stock?

In short, I like to look for a spread of about $0.10… But that can vary depending on the price and average volume of the underlying stock.

Let’s take a closer look at what I mean, using some options spread examples to put things in perspective…

Options Spread Examples: How Wide Is Too Wide?

As I mentioned, the first thing I like to look for is a spread of $0.10 or less.

One of the examples we were looking at in the War Room was the Caterpillar Inc. (NYSE: CAT) March 18 $200 strike calls. The bid was $1.76 and the ask was $1.83, so a spread of $0.07.

That’s in line with what I would call a good trade.

As I mentioned, however, it also depends on the price of the stock…

So this is a range I like to stick with if a stock is priced around $40 or less. If it’s a more expensive stock, I’m willing to expand that range and look at options with a wider spread between the bid and the ask, also known as the bid/ask. 

For example, we took a look at Qualcomm Inc. (Nasdaq: QCOM)...

The March 18 $170 call option was trading with a bid of $6.70 and an ask of $6.95. Given the price of the stock, a $0.25 spread can be acceptable as long as there’s sufficient volume.

And if you’re trading an expensive stock, you want there to be a lot of volume because as always, our goal is to get the price we want, and be able to execute the trade as quickly as possible. 

Check out the video below for more options spread examples, to see how much volume is enough, and learn what makes a trade a good play or not. 

You can follow me @LanceIppolito on Twitter, Instagram and our YouTube channel for more trading insights and tips. And as always, you can find me right here talking stocks and options trading — and printing money — on WealthPress.com!

P.S. The Market Makes This Move 70% of the Time… 

Believe it or not, but the stock market’s stagnant 70% of the time… So time decay is eating away at options, and traders everywhere are paying for it! 

It’s no surprise that the Chicago Mercantile Exchange says 76.5% of options expire worthless. 

So when rare and large moves in the markets occur, people often watch their trading accounts get wiped out time and time again. It’s a frustrating whipsaw of action that demoralizes traders. 

That’s why Joy of the Trade Head Trader Jeff Zananiri’s No. 1 goal is keep everyone away from this disappointing, costly process…

WRITTEN BY<br>Lance Ippolito

Lance Ippolito

What to read next

99 Problems and a “Pivot” is One

99 Problems and a “Pivot” is One

A friend of mine sent me this chart about three months ago. I should probably print it and keep it in my wallet next to a photo of my daughter. Given the sheer number of questions I’ve fielded lately, I’ll probably end up showing this chart more than her picture.

read more
Everything Everywhere, Going Down, All At Once

Everything Everywhere, Going Down, All At Once

When our momentum reading went negative last week, I didn’t know that we’d have the second largest bank failure in U.S. history three days later. All I knew was that it went negative… and that we got out of the way.

read more
Trust But Verify…

Trust But Verify…

I want to talk about our version of “Trust but Verify” in the markets. Qualification is the most important part of the investing process. And this F score value strategy looks to be crushing the current market.

read more

Have any questions? Contact Our Customer Service Team