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"Must I always buy call options at the ask price, and sell them at the bid?"


Question By Mike

"Must I always buy call options at the ask price, and sell them at the bid?"

Must I always buy call options at the ask price, and sell them at the bid?

Asked on 1 March 2010

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Answered by Mr. OppiE

Hi Mike,

This is a simple question that doesn't come with a simple "Yes" or "No" answer. That's because I am sure you have heard of people "Buying on the Bid" and "Selling on the Ask", right? In fact, I would reckon that's where your question is coming from.

First of all, to set the record straight, an order to buy (whether using a Buy To Open or Buy To Close) an options contract is ALWAYS filled on the "Ask" Price and an order to sell (whether using a Sell to Open or Sell to Close) an options contract is ALWAYS filled on the "Bid" price.

Now, what does Bid and Ask REALLY mean? Ask is the price market makers are ASKING for selling you their options and Bid is the price market makers are BIDDING for your options. The difference in the bid and ask price, known as the bid ask spread, represents the profit market makers earn for making markets for that particular options contract. This is why ask price is always higher than bid price and why buy orders are always filled on the ask price and sell orders filled on the bid price.

So what's the deal with "Selling on the Ask" and "Buying on the Bid"?

Selling on the ask really means placing a limit order to sell on the prevailing ask price and Buying on the Bid means placing a limit order to sell on the prevailing bid price. Obviously this means queuing for those prices as these orders will NEVER get filled immediately like a market order. Selling on the ask only works when the bid price of the option RISES to the price you were queuing for (the prevailing bid price) and buying on the bid only works when the ask price of the option falls to the price you were queuing for. In essence, you are STILL selling on bid price and buying on ask price only that you were trying to queue for a better price, see?

Must I always buy call options at the ask price, and sell them at the bid?

AAPL was trading at $195 and its call options ($170 strike) are asking at $27.95 and bidding at $25.00.

Buying on the Bid

Instead of buying these call options at its prevailing asking price of $27.95, you decided to queue for a better price by entering a limit order on its current bid price of $25.00. The orders were placed and after a few minutes of waiting, AAPL did a quick dip in price, bringing the ask price of those call options down to $25.00 from $27.95 and your order was filled.

The next day, AAPL rises to $205 and its $170 strike call options are asking at $40.00 and bidding at $37.00.

Selling on the Ask

Instead of selling these call options you own at its prevailing bid price of $37.00, you decided to queue for a better price by entering a limit order on its current ask price of $40.00. The orders were placed and after a few minutes of waiting, AAPL continued to rise in price and brought the bid price up from $37.00 to $40.00 and your order was filled.



From the examples above, it should be clear that the risk in doing so (if there is no risk, everyone should be doing it, right?) is that you might miss the entire trade or eventually have to buy or sell at even worse prices if the stock did not move in the direction of your favor.

Must I always buy call options at the ask price, and sell them at the bid?

AAPL was trading at $195 and its call options ($170 strike) are asking at $27.95 and bidding at $25.00.

Buying on the Bid

Instead of buying these call options at its prevailing asking price of $27.95, you decided to queue for a better price by entering a limit order on its current bid price of $25.00. The orders were placed and a few minutes of waiting turned into a few hours and the order was never filled as AAPL continued to move up strongly, taking the price of its call options higher and higher.

The next day, AAPL rises to $205 and its $170 strike call options are asking at $40.00 and bidding at $37.00.

Selling on the Ask

Instead of selling these call options you own at its prevailing bid price of $37.00, you decided to queue for a better price by entering a limit order on its current ask price of $40.00. The orders were placed and minutes turned into hours and the order was never filled as AAPL reversed course after such a strong rally and started heading downwards... soon, all your profits were gone and the call options were still in your account.



The only persons who REALLY buy at bid and sell at ask are market makers. Instead of queuing on the opposite price, some professional options traders do what we call "Straddling the bid ask spread". This means to try getting a better price by queuing for a price in between the bid and ask price. This method works better than the one in the examples above when the bid ask spread is fairly narrow and there is a fair amount of price volatility. Even so, the risk of not filling or price compromise still exist.




In conclusion, unless you are a market maker, there is no such thing as buying on the bid and selling on the ask and you will always buy call options at the ask and sell them at the bid. By queuing for a better price, you are really just taking a chance which may cause you to miss your entire trade or eventually compromise for an even worse price.

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