{"id":33,"date":"2015-01-08T16:39:17","date_gmt":"2015-01-08T21:39:17","guid":{"rendered":"\/?p=33"},"modified":"2016-07-05T15:48:30","modified_gmt":"2016-07-05T19:48:30","slug":"bid-ask","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/options\/basics\/bid-ask\/","title":{"rendered":"08) Bid & Ask"},"content":{"rendered":"

In this lesson we\u2019ll discuss the Bid and Ask prices, which are found on the options chain.<\/p>\n

The BID price<\/b> is the current price you\u2019d likely be able to SELL <\/b>a particular options contract if you entered a market SELL order.<\/b><\/p>\n

The ASK price<\/b> is the current price you\u2019d likely be able to BUY <\/b>a particular options contract if you entered a market BUY order.<\/b><\/p>\n

 <\/p>\n

Importance of Liquidity<\/b><\/h2>\n

When trading options, it\u2019s in your best interest to try to trade option contracts that have a good amount of contracts bought and sold each day (also known as volume).<\/p>\n

Contracts with a large amount of daily volume are also referred to as having good liquidity. \u00a0This is an important attribute to look for, because the price difference between the BID and ASK (aka, the BID\/ASK spread) is commonly much less for very liquid options.<\/p>\n

So, for example an illiquid <\/b>option contract might be price at \u2026<\/p>\n

$1.00 BID x $1.75 ASK \u00a0: \u00a0That\u2019s a 75% price difference<\/b> between the BID and the ASK. \u00a0This usually results in you overpaying <\/b>to acquire the contract and being underpaid <\/b>when you sell the contract.<\/p>\n

Now, with a very liquid <\/b>option contract you\u2019ll likely see something more like\u2026<\/p>\n

$20.00 BID x $20.50 ASK: That\u2019s only a 2.5% price difference<\/b> between the BID and the ASK. \u00a0This would likely results in you having a very fair <\/b>purchase price and a very fair <\/b>sell price.<\/p>\n

 <\/p>\n

Buying at the Midpoint<\/b><\/h2>\n

Another great thing about trading liquid option contracts is that you can commonly buy and sell them at the midpoint between the BID and ASK. \u00a0So, with a $20.00 BID x $20.50 ASK, you could likely purchase or sell the contracts for $20.25.<\/p>\n

To be sure to get this \u201cdeal price\u201d you would enter what\u2019s called a limit order<\/b>. \u00a0With a buy limit order <\/b>you\u2019d only buy a contract at or below your limit price and with a sell limit order <\/b>you\u2019d only sell your contracts at or above your limit price.<\/p>\n