What Is the “Bid-Ask Spread” in Options Trading and How Does It Relate to Transaction Cost?

The bid-ask spread is the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask) for an options contract. This spread represents an immediate, implicit transaction cost for the retail trader.

If a trader buys at the ask and immediately sells at the bid, the difference is the cost incurred. The spread is essentially the profit margin for the market maker or liquidity provider.

A wider spread indicates lower liquidity and a higher transaction cost for the trader.