Bid-Ask Spread refers to the difference between the highest price a buyer is willing to pay (bid price) and the lowest price a seller is willing to accept (ask price) for an option. It represents the transaction cost in the market. A narrower spread indicates higher liquidity and tighter competition between buyers and sellers, while a wider spread suggests lower liquidity and less active trading.
- Bid-Ask Spread: The gap between the bid price and ask price of an option.
- Indicator of Liquidity: Narrow spreads show high liquidity; wide spreads show low liquidity.
- Impact on Traders: A wide spread increases trading cost for both buyers and sellers.
- Effect of Volatility: Higher market volatility can lead to wider bid-ask spreads.
- Active Markets: Popular strikes and expiry options tend to have very narrow spreads.
Example:
Suppose the NIFTY 18000 Call Option shows a bid price of ₹98 and an ask price of ₹102. The bid-ask spread is ₹4, showing a relatively liquid and active market for that strike.
