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Liquidity, spreads & limit orders for options

Why wide markets quietly destroy options traders.

9 min · Beginner

What you'll learn

• Measure the cost of a bid/ask spread in dollars and as a percentage
• Screen contracts for liquidity using spread, volume and open interest
• Work a limit order from the mid price instead of using market orders

Key takeaways

• The bid/ask spread is a real cost paid on entry and again on exit.
• Screen contracts by spread percentage, open interest and daily volume before trading.
• Never use market orders on options; start limit orders at the mid and walk them slowly.
• Many small-cap and penny-stock options are too thin to trade well, and sometimes the right order is no order.

Glossary

• Liquidity — How easily a contract can be bought or sold near a fair price.
• Limit order — An order to buy or sell at a set price or better.
• Slippage — The difference between the expected fill price and the actual fill price.
• Walk-away price — The worst price you decide in advance you will accept for a fill.

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