Options Trading Costs Are Lower than You Think
Read the paperopens doi.org in a new tab
What they found
Quoted bid-ask spreads on options are wide, but the authors show that the timing of trades matters: option quotes update slowly relative to the underlying stock, and traders who execute when the stale quote is in their favor pay much less than the quoted spread. Using 2004 to 2015 data, they show that a simple timing strategy based on the underlying's recent move reduces effective spreads by roughly 40%, and that a large share of options trades already occur at such favorable moments, so the true cost of options trading is well below what quoted spreads imply.
What you can use
- Option quotes lag the stock; waiting for the stock to move in your favor before hitting a quote can cut your effective spread substantially.
- Use limit orders near the midpoint and execute when the underlying has just moved toward your side of the trade.
- Quoted spreads overstate the cost of a well-executed option trade, but a market order still pays the full spread.
Caveats
Requires attention to intraday timing that may not be practical for all retail traders. The savings are relative to quoted spreads, which remain wide on illiquid options.
Tags: options, transaction-costs, execution, bid-ask-spread
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.