How Does an Increased Bid-Ask Spread Affect Market Liquidity for an Option?

An increased bid-ask spread directly decreases market liquidity for an option. Liquidity is the ease with which an asset can be bought or sold without significantly affecting its price.

A wider spread means there is a larger gap between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). This larger gap makes it more expensive for traders to enter or exit a position quickly, discouraging trading and thus reducing the overall market liquidity.