Option Bid-Ask Spread: Relative Spread and Trading Cost Explained

The option bid-ask spread is the gap between the highest price a buyer is bidding and the lowest price a seller is asking. Vyreon measures it relative to the option's price, (ask − bid) ÷ midpoint, for options near the share price expiring in 7 to 45 days, and reports the median and the 90th percentile. It is a measure of how costly it is to trade a security's options.

What Is The Bid-Ask Spread On Options?

Bid: the best price someone is willing to pay.
Ask: the best price someone is willing to sell at.
Midpoint: halfway between the two, a common reference for an option's value.

Buying at the ask and selling at the bid loses the full spread, so a round trip costs roughly the spread, and a single trade roughly half of it compared with the midpoint.

Why Relative Spread Matters

A $0.10 spread means little on a $20 option and a lot on a $0.50 option. Dividing by the midpoint puts every contract on the same scale:

Relative spread = (ask − bid) ÷ ((ask + bid) ÷ 2)

Illustrative example: an option bid at $1.95 and offered at $2.05 has a midpoint of $2.00 and a relative spread of 5%. Trading it at the ask instead of the midpoint costs 2.5% of the option's price before any move in the stock.

Tight spreads are associated with active, competitive markets (see Sources). Wide spreads mean each trade gives up more, and yields or prices calculated at the midpoint are harder to achieve.

How Vyreon Measures It

Contracts: calls and puts with a strike within 5% of the closing share price, expiring in 7 to 45 calendar days. Restricting the window this way keeps quotes comparable across securities.
Quotes: closing bid and ask. Only valid two-sided quotes count: both sides present, a bid above zero, and the ask not below the bid.
Figures: the median relative spread (half the measured contracts are at or below it) and the 90th percentile (the widest tenth are above it), plus the number of contracts measured.
At least 3 valid contracts are needed; otherwise the figure is withheld for that day.

Illustrative example: a median of 2% and a 90th percentile of 6% means half of the near-the-money options quoted a spread of 2% of their price or less, and nine in ten quoted 6% or less.

Why Spreads Differ Between Stocks

Studies of stock and index-option markets have linked narrower spreads to heavier trading (see Sources), which fits tighter spreads for heavily traded securities such as large index ETFs and mega-cap stocks than for thinly traded names. Relative spreads are also wider for low-priced options, where the minimum price step is a larger share of the price. Spreads can widen around earnings and in volatile markets, when market makers take on more risk per quote.

What It Does Not Tell You

The spread during the day. These are closing quotes; spreads can be wider at the open and can change minute to minute.
The spread on contracts outside the window, such as far out-of-the-money or long-dated options, which can be wider.
The price you would actually get. Orders can fill inside the spread, or worse for large sizes.
How deep the market is. A tight quote may be good for only a few contracts.

Sources

Harold Demsetz, "The Cost of Transacting", Quarterly Journal of Economics (1968): the bid-ask spread as a cost of trading, narrower with more trading activity.
Thomas J. George and Francis A. Longstaff, "Bid-Ask Spreads and Trading Activity in the S&P 100 Index Options Market", Journal of Financial and Quantitative Analysis (1993).