What is the buy / sell spread?？
The difference between the bid and ask prices is called the buy / ask spread, and the buy / sell spread is an indicator of supply and demand: a low buy / sell spread usually indicates higher demand, while a high buy / sell spread usually means fewer people are trading the product。
There are two ways to buy online: you can immediately buy an item at any price the seller asks, or you can bid on your own as a trade-off between getting the best possible price and buying immediately。Financial markets are similar, with an asking price for each stock or option contract, which is the minimum price required by the seller。There is also a bid, or the maximum price the buyer is currently willing to pay。
The bid price is almost always lower than the ask price.。The difference between the bid and ask prices is called the buy / ask spread, and the buy / sell spread is an indicator of supply and demand: a low buy / sell spread usually indicates higher demand, while a high buy / sell spread usually means fewer people are trading the product。
Who determines the bid and ask prices？
Prices are driven by all market participants, investors from large institutions (e.g. hedge funds, banks, pension funds, mutual fund managers, etc.), financial advisors and individual retail investors.。
Given that all people and institutions want to trade lots of different sizes, there needs to be a way to facilitate these transactions, and the main job of a market maker is to match potential buyers with sellers。
Market makers play an important role in helping to provide liquidity to financial markets, meaning you can often buy and sell easily and quickly。If there is no market maker to facilitate trading, it will be much more difficult to buy and sell at the time you want and at the price you want。
The perfect match does not always appear at the right time。Market makers buy when no one wants to buy and sell when no one wants to sell, for which they are compensated - similar to the way physical or virtual auctions may earn a small fee for providing a place to promote sales。The market maker's cut is the difference between the bid and ask prices.。
Liquidity
Depending on the supply and demand for a particular product, bid-ask spreads can vary significantly。Low bid / sell spreads usually indicate good liquidity.。Be aware of liquidity, as illiquid options with large bid / ask spreads may cut into your potential profits and other issues。
If the bid price of an option contract is 0.$75, with a sell price of 1.00 美元。If you take 1.Buy the contract for $00 and sell it back immediately, even if the option price does not change, you will suffer a 25% loss。
Processing Option Orders
When buying or selling an option contract, it is more likely to be traded when your order is at the ask price or the bid price, also known as natural pricing。
- For buyers, the natural price is the asking price。
For sellers, the natural price is the purchase price。
If you are looking for a better price, you may execute the order, which means offering a lower price or a higher price。Some traders may try to execute the order at an intermediate price (mark price), which is the middle value between the bid and the ask price。For example, the purchase price is 2.00 U.S. dollars, selling price is 2.The marked price of a $10 option contract will be 2.05 USD。
The advantage of marking the price is that you will pay less or get more。However, there is less chance that your order will be closed。Similar to virtual auctions, if you want to buy, a higher bid will increase your chances of winning the auction, and a lower asking price will increase your chances of selling。
Select Price
The default for option orders is natural pricing, which means your order will be pre-populated with the bid or ask price。If you send an order at a natural price, assuming sufficient liquidity for that particular contract, the order is likely to be closed。
However, you can choose to set the default pricing to a natural price or a marked price。The advantage of using marked prices is that you can execute orders and possibly get a better price。The cost is that you may have to wait longer to complete your order, or your order may never be completed。Remember that you can always update the order price by cancelling and replacing。
Order Type
You can use limit orders or stop-loss limit orders:
- Limit orders allow you to set the highest price you are willing to buy or the lowest price you are willing to sell。
- Once a specific price is reached (called the stop loss price), the stop loss limit order is activated。
Keep in mind that limit orders are not guaranteed to be executed。Both sides of the transaction must have buyers and sellers.。If there are not enough contracts in the market to complete your limit, it may take multiple trades to complete the entire order, or the order may not be completed at all。
Note
Options trading carries significant risk and is not suitable for all clients。Customers must read and understand the characteristics and risks of standardized options before engaging in any options trading strategy。Options trading is often complex and may involve the possibility of losing the entire investment in a relatively short period of time。Certain complex option strategies carry additional risks, including potential losses that may exceed the original investment amount。
Past performance of a security or financial product does not guarantee future results or returns。Clients should carefully consider their investment objectives and risks before investing in options。Because of the importance of tax considerations to all options trading, clients considering options should consult their tax advisors about how taxes affect the outcome of each option strategy。
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