Why Do Out-of-the-Money Options Often Have Wider Spreads?

Out-of-the-money (OTM) options typically have wider spreads because they possess lower liquidity and trade less frequently than at-the-money (ATM) options. Their low price also means a small absolute spread represents a larger percentage cost.

Market makers perceive higher risk in trading OTM options due to lower volume and greater uncertainty about whether they will ever become profitable, leading them to demand a wider compensation margin.