You can have the perfect strategy and still bleed money on execution. Understanding how the market plumbing works turns invisible costs into manageable ones.
The bid-ask spread
Every option has a bid (highest price buyers will pay) and an ask (lowest sellers will accept). The gap between them is a real, recurring cost:
- Buy at the ask, sell at the bid — you “cross the spread” and pay the difference every round trip.
- Wide spreads on illiquid options can quietly dwarf your edge. Always check the spread before trading.
Market makers
Most option liquidity comes from market makers — firms that continuously quote both a bid and an ask, profiting from the spread while staying roughly delta-neutral by hedging with the underlying. They’re your counterparty far more often than another retail trader. They’re not the enemy, but they price in their edge — your job is to not give them more than you have to.
Liquidity and why it matters
Liquid options (tight spreads, high open interest and volume) let you enter and exit near fair value. Illiquid ones mean:
- Wider spreads (higher cost).
- Slippage — your order moves the price against you.
- Trouble getting out when you need to.
Favour liquid underlyings and near-the-money, near-dated strikes where the crowd trades.
Order types
- Market order — fills immediately at whatever price is available. Fast, but on options it can fill terribly in a wide market. Usually avoid.
- Limit order — fills only at your price or better. The default for options. Try to work toward the mid-price between bid and ask rather than paying the full ask.
The takeaway
Execution is the silent tax on every trade. Trade liquid products, use limit orders, aim for the mid, and respect the spread. The strategy gets the glory, but microstructure decides how much of the edge you actually keep.