Options 101: Bid/Ask, Open Interest and Volume
February 8, 2016
Last update: July 2021
Welcome back to the Options 101 series presented by Tackle Trading! In this series, I will examine some of the basic concepts that you need to understand as you start to trade options. Options contracts are derivative products where their value is dependent on factors driven by the stock price, time til expiration, implied volatility and characteristics that are driven by the strike price you trade. In this week’s article, we will look at the Bid/Ask spread, open interest, volume, and how these characteristics affect a trader’s decision-making.
Bid-ask spread
Every option has a price. This price can be thought of in several different ways. The mark price of the option is the one you see in your position statement most often. But, this may not be the actual ‘price’. Options are a product that is traded by both buyers and sellers. Buyers offer the price they’re willing to pay – this is the bid price. Buyers are bidding exact prices to try to get filled. Sellers offer prices they’re willing to receive to sell the option. Sellers are bidding exact prices to try to get filled. These prices establish the bid/ask spread. Let’s use an example to help everyone understand how these numbers are established.
If you look at an option chain you will see the Last, Mark, Bid, and Ask. The bid price shown is the best available bid price that is quoted from one of the major exchanges. If the bid price on a specific option is 2.40. That means that there may be many bids….say 2.10, 2.20, 2.25, 2.35, and 2.40. The highest number is the one shown on the screen because it represents the best bid being traded on the market. On the same option, sellers are probably offering many prices as well. They may be coming in at 2.80, 2.70, 2.60, 2.55, and 2.50. These are all ‘asks’ and offers being given by sellers.
The bid-ask spread on the example above would be shown as 2.40 / 2.50. These are the tightest version of the spread. The distance between bid and ask reflects the liquidity of the underlying option. If you’re trading options short-term using day, swing, or position trading strategies you want to look for options that have relatively tight bid-ask spreads. The general rule is to look for spreads that are .30 or less in distance between bid and ask. This establishes a ‘liquid’ spread.
Larger-priced stocks, indexes and ETF’s may have slightly larger spreads. You CAN still trade these. If you trade options that have larger spreads, you run the risk of poor fill prices or volatile conditions opening the spread even further. The more volatile the options, the more likely the spread will open up to a large distance during certain economic events, at the market open or high periods of market volatility. You can still trade these options, but if you do, you need to learn how to execute limit orders and get good fill prices.
Some options trade on spreads that are only 5 or 10 cents in increments. Other options trade on penny increments. Your offer to the market in your order should reflect the type of option chain you are trading. If you look at a bid/ask spread and the prices are 1.47/1.51 then those are penny options. It’s easily identified by looking at the chain and simply finding the numbers. Do the increments move in only .05 or .10 increments or do they move in pennies? Penny options can be ordered for penny fills. If you offer .67 for a spread, then it should be because its a chain that has penny options. If you’re a trader who uses Thinkorswim, the automated mark price built into vertical, calendar and multi-legged spreads will come in at the mid-point ‘Mark’ price. Sometimes, even with nickel or dime options, it may come in at a penny increment. You need to adjust your offer to a nickel increment to put yourself in a position to more likely get a fill price.
Open Interest
Open Interest is a measurement of the number of open contracts on the market. It adds up all the open buys and sells and tally’s the number and puts it in your option chain. A general rule is to trade options that have 100 contracts of open interest or more. There are some exceptions. If a contract was just created on a highly liquid stock, then it’s possible the open interest will be low, but the option will still be tradeable. If you’re not sure, then go with the rule that there should be at least 100 contracts or more before you trade that strike price. For new traders, it’s better to lean on the side of safety and make sure you’re trading liquid options. Open Interest is a reflection of liquidity.
Volume
Volume represents the number of options contracts traded that day. In the morning, volume will naturally be low. For the most traded options in the market, volume will come in early in a trading day. Consider what stock you’re trading, what time of day it is, and look at all of the strikes in the option chain before making a judgment on whether the volume is high enough for your trade. It’s nice to see some volume – but its the lowest priority of the 3 concepts we’ve examined today. The bid/ask spread reflects a willing market. The open interest is a reflection of a traded market. The volume is simply a measure for today’s trading. If you have a tight bid/ask spread, over 100 contracts of open interest, but little volume you can still safely make your trade.
—
In our next section of the Options 101 series, we will examine the Language of options including calls, puts, in-the-money, Out-of-the-money, and at-the-money. If you have questions from any of these posts, please post in the Clubhouse, email us team@tackletrading, or tweet me @timjusticeutah.
Thanks for your time reading, and get in the Game!
Options Trading for Beginners
Continue learning the basics of Options trading with this additional freemium content from Tackle Trading.
Options 101 [Free Content]
Access more free high-quality articles to improve your knowledge of Options Trading.
Options for Beginners: Meet a Popular Greek Named “Delta”
In this article, Gino Poore delivers a great lesson on understanding and using the Delta of an option.
How to add Insurance to your Portfolio
In this video tutorial, Coach Matt takes a look at different ways to protect your portfolio accounts when the market goes south.
Options 101: Getting Started
The goal of this Options 101 series is to educate you as a trader and help you develop the right perspective on how to use options in your business.
Options 101: Expiration, Strikes, and Basics
Learn the basics on what is an option, options expirations, call and put options and also strike prices.
Options 101: Bid/Ask, Open Interest and Volume
In this Options 101 article, we will look at the Bid/Ask spread, open interest, volume, and how these characteristics affect a trader’s decision-making.
Options 101: The Language of Options
In this article, we’ll dive into some of the language and definitions you’ll hear as an options trader.
Options 101: Naked Put Basics video
In this video edition of the series, Coach T examines the basics of the Naked Put strategy.
Options 101: Managing Credit Spreads (Thinkorswim Tutorial)
In this tutorial video, Coach T shows how to manage a credit spread and how to set up a contingency in ThinkOrSwim.
Options 101: Bull Put Spread Research
In this video, Coach Tim walks you through how to find candidates for bull put spreads.
Options 101: Risk Graph Basics (Thinkorswim Tutorial)
In this Thinkorswim tutorial video, Coach T walks the team through how to use the risk graph for options trading.
Options 101: How to set Basic Stops on Naked Puts and Covered Calls
In this video tutorial, Coach T walks the team through how to set a basic stop on a covered call or naked put position.
How to Protect Your Retirement
Coach Matt from Tackle Trading looks at how passive and active investors can insure their retirements against another potential market crash like in the sub-prime crisis of 2008-09.
How to use the Theta Research Tool to find the best stocks for Cash Flow
In this video tutorial, Coach Matt goes through the latest edition of the Options Research Spreadsheet explaining how to use it to find the best stocks to cash flow.
Options 101: How to Add a Protective Put to A Covered Call
In this video, Tackle Trading’s Coach Tim explains when, how, and why a trader would buy a put option on a covered call position.
Tackle 25 List: The Best Stocks for Covered Calls (2016 Edition)
The Tackle 25 2016 Edition is up and better than ever. This list contains the best stocks to cash flow and compound your gains.
Tales of a Technician: Quell your Unfounded Assignment Fears
The assignment hobgoblin has been haunting the dreams of novice traders since the dawn of the options market.
Options 101: How to protect against earnings risk
In this video, Coach Matt shows new traders how to protect against the earnings risk and still cash flow with the covered call.
Trade Journal Series: How to use the Theta Research to find Covered Call candidates
In this video tutorial, Coach Tim Justice teaches how to find the best candidates to trade the Covered Call options strategy using the Theta Research tool.
Tackle 25 List: The Best Stocks for Covered Calls (2017 Edition)
The Tackle 25 2017 Edition is up and better than ever. This list contains the best stocks to cash flow and compound your gains.
Tales of a Technician: Delta Limits
“On Delta trading, what would be a reasonable delta limit for my portfolio?” Let’s hop to it.
Women In Trading: Options – My new love language
Let us talk options basics. Let me try to help you make sense of it all.
Options Theory: Long Calls
The long call is a seductive chap. Today kicks off the first in a multi-part series on options strategies.
Options Theory: Naked Put Basics
Today we turn to a popular cash flow strategy: the Naked Put. Come learn the basics.
Options Theory: The Protective Put
The options realm is an insurance marketplace where stock owners can acquire protection against loss in their beloved equities.
Options Theory: Delta, the Great Equalizer
I love the options greeks for many reasons. One will be on full display today. Delta is a multi-faceted metric used by traders a variety of ways. Perhaps one of my favorites is to use it as an equalizer.
Options Greeks Guide Part 2: What Is The Black-Scholes Model
What is the Black-Scholes Model and how to use it in your trading? This is what this video will cover.
Options Greeks Guide Part 3: What Is Delta
Delta is the most famous options Greek. Come learn what Delta is and how it can help you become a better trader.
Options Greeks Guide Part 4: What Is Theta
To professional traders, Theta means CASH FLOW and PASSIVE INCOME. Come learn more about this powerful option Greek and how it can benefit your trading skills.
Options Greeks Guide Part 5: What Is Vega
How does Vega work? What is the correlation between Vega and volatility? How does it affect options premium? That is what you will learn in this video.
Options Greeks Guide Part 6: What Is Gamma
What is the correlation between Gamma and Delta and how does that impact your trading business? Learn more about this underrated option Greek in this video.
Options Greeks Guide Part 7: What Is Rho
What is Rho? How does Rho affect options premium? This is what you will learn in the latest episode of this Options Greeks video series.
Options Theory: What is Implied Volatility Rank?
In this week’s video, I’ll show you how to understand Implied Volatility (IV) and Implied Volatility Rank (IV Rank).
Tackle Today: Call Options
Call Options is all about leverage and limited liability. Read further.
Tackle Today: Options Greeks Webinar
Mark your calendars for Monday, Feb 28th. On our YouTube Channel at 8:30 PM EST, I’ll be hosting a webinar titled Options Greeks for Beginners.
Tackle Today: Delta is for Direction
Delta might be the most fascinating Greek for the simple fact that it is multi-dimensional.
Tackle Today: Delta Brings Precision to Probability
Delta measures the probability of an option expiring in-the-money.
Tackle Today: Theta & Time Decay
Theta measures how much an option loses in value per day.
Tackle Today: Vega & Volatility
Volatility plays a significant role in options pricing. Read further.
Tackle Today: Gamma & Velocity
As a final message to prepare you to tonight’s webinar, let’s talk about option greek gamma.
The Options Heuristic Series [Free Content]
How can we explain the basics of Options so that our students can really learn, without getting confused with so many concepts, terminologies, and strategies? That’s the idea behind the series.
Options Greeks Guide [Free Content]
The Options Greek Guide is a simple, powerful resource to help you better understand how to use the Greek’s.
As you build, enter, and manage Options Trades, it’s helpful to understand the math behind the Black Scholes Option Pricing Model. Using the Options Greek Guide will give you the information and training on how time, volatility and asset price changes impact options values.
Options Greeks Guide Part 1: What Are Options Greeks
What are the Options Greeks and how can you utilize them in your trading routine in order to perform better in the market? This is what you will be learning in this video series.
Options Greeks Guide Part 2: What Is The Black-Scholes Model
What is the Black-Scholes Model and how to use it in your trading? This is what this video will cover.
Options Greeks Guide Part 3: What Is Delta
Delta is the most famous options Greek. Come learn what Delta is and how it can help you become a better trader.
Options Greeks Guide Part 4: What Is Theta
To professional traders, Theta means CASH FLOW and PASSIVE INCOME. Come learn more about this powerful option Greek and how it can benefit your trading skills.
Options Greeks Guide Part 5: What Is Vega
How does Vega work? What is the correlation between Vega and volatility? How does it affect options premium? That is what you will learn in this video.
Options Greeks Guide Part 6: What Is Gamma
What is the correlation between Gamma and Delta and how does that impact your trading business? Learn more about this underrated option Greek in this video.
Options Greeks Guide Part 7: What Is Rho
What is Rho? How does Rho affect options premium? This is what you will learn in the latest episode of this Options Greeks video series.
Options 101 Course [Premium Content]
The Options 101 Course is exclusive to PRO members. Try it for free for 15 days by clicking on the button below.
Options Report [Premium Content]
The Options Report is a weekly briefing delivered to Pro members of Tackle Trading. In this report, you will receive information and education that will help you develop as a trader. We will also highlight attractive trade setups for the coming week that you can add to your watchlist.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
Thank you for the Options 101 series! The simplicity in the way that you explain things is greatly appreciated. Looking forward to the next blog!!
You are welcome Michael. Thanks for reading it.
Thanks Tim. I made a pretty move with HSNI and didn’t understand why there was such a wide Bid/Ask spread (the average volume is at 322K, so it’s not too liquid). Does momentum have an effect in the bid/ask spread? If a stock is gaining momentum, would that tighten up the spread?
Thanks Tim…