12. The "Bid / Offer" Spread

We all prefer doing things on our own terms. When trading options, however, we must accept the terms of the market. What am I referring to? The bid/offer spread.

At any particular moment in time, the highest price anyone (floor traders trading for their own account or floor brokers holding customer limit orders) is willing to pay is "the bid." The lowest price anyone is willing to sell is "the offer." With the exception of Eurodollar options, rarely will you see a posted bid/offer. And that's because commodity futures contracts are large in dollar size and volatile by nature.

Floor brokers holding customer orders typically ask floor traders to quote markets before they disclose the nature of the order they're attempting to fill. So when initiating new option spread positions, you can be particular and specify the net debit or credit you'll accept. If your terms are too stringent, however, your order won't get filled.

When you must adjust a position, it's often better to execute your orders "at the market." The slippage you incur by buying the offer and/or selling the bid can be a small sacrifice versus not obtaining a fill and leaving your position exposed to unfavorable market movement.

"Knowledge is power and all traders can benefit by continually bolstering their knowledge base. I hope to contribute in that regard."  Paul Forchione