Understanding the Bid/Ask spread is essential when using the Wheel Strategy trading options, because it directly affects how much premium you collect and how efficiently you enter and exit trades.
What is the Bid/Ask Spread?
The Bid is the highest price a buyer is willing to pay for an option.
The Ask (or Offer) is the lowest price a seller is willing to accept.
The Spread is the difference between the bid and ask prices. For example, if a put option has a bid of $1.00 and an ask of $1.10, the spread is $0.10.
Why It Matters in the Wheel Strategy
When executing the Wheel Strategy, you’re typically on the selling side — selling a cash-secured put or selling a covered call. In these cases, your goal is to sell at the highest possible price, which means aiming for the Ask. However, if you use a market order, you’ll often be filled closer to the Bid, which is lower. This can cost you money because wider spreads may lead to leaving premium on the table if you don’t negotiate your entry price.
Best Practices for Managing the Bid/Ask Spread
Use limit orders rather than market orders. Always place your limit orders slightly below the Ask when selling options. For example, if the Bid is $0.95 and the Ask is $1.05, try selling at $1.03 or $1.02 — you might get filled for more than the Bid.
Look for tight spreads. A narrow spread such as $1.00 / $1.02 is preferable to a wide one like $1.00 / $1.20. Tight spreads are typically associated with high liquidity, which makes it easier to enter and exit trades.
Choose highly liquid stocks or ETFs. Securities with high volume and open interest in options tend to have tighter spreads. Examples include SPY, QQQ, AAPL, AMD, and MSFT.
Don’t chase fills. If your order isn’t filled right away, remain patient or make a small adjustment to your limit. Avoid immediately accepting a worse price.
Understand the concept of the “mid-price.” This is the midpoint between the Bid and Ask and is a good estimate of fair value. Many trading platforms allow you to submit orders at the mid-price or slightly above it when selling.
Summary
The Bid represents what you may receive if you sell at market, though it is often too low. The Ask is the price you ideally want when selling.
The Spread reflects the cost of inefficiency – the narrower, the better. A Limit Order helps you get a better fill price. Liquidity is crucial for tighter spreads and smoother execution.