Bid-Ask Spread — Reading Liquidity from the Chain
Wide spreads kill option strategies. How to read bid-ask before trading any strike.
Bid-Ask spread = the gap between the highest buy order and the lowest sell order. It's the immediate cost of crossing the market and the cleanest liquidity gauge available.
Tight spreads = liquid market. Wide spreads = thin market where you'll lose money just on entry+exit costs.
Typical spread ranges
NIFTY ATM weekly options: ₹0.50-2 spread. Very liquid.
NIFTY 3-5% OTM weekly: ₹2-5 spread. Liquid but noticeable.
NIFTY 5%+ OTM or monthly far-month: ₹5-15 spread. Caution.
Stock options ATM weeklies don't exist (monthly only). Stock monthly options: ₹1-3 ATM, ₹5-20 OTM.
Spread as % of premium
Better metric than absolute rupees: spread as % of mid-market premium.
Under 2%: very liquid, safe to trade.
2-5%: acceptable for short-hold trades.
Above 10%: skip unless you're patient with limit orders.
Common misreads
- Looking at LTP without bid-ask. LTP can be in the middle of a 10% spread — you'll get filled at a much worse price.
- Sizing positions by premium without considering spread cost. A ₹40 option with a ₹4 spread costs ₹4 just to enter and exit.
Key takeaways
- Spread = ask - bid. Cost of immediate execution.
- Tight ATM index spreads (<2%) are safe to market-order.
- Wide spreads (>10%) make round-trip trading uneconomic.
- Always check spread before sizing — illiquid strikes mean smaller positions.
Spread reading
What's a good NIFTY ATM weekly spread?
Under ₹2 absolute (about 1-2% of premium). Anything tighter is excellent; ₹2-5 is acceptable; ₹5+ is unusually wide for ATM.
Why are far OTM spreads so wide?
Low trader interest — market makers don't tighten spreads where there's no flow. Many ATM-only trading strategies fail when transferred to OTM strikes due to spread cost alone.
Can I always get filled at the mid?
Usually yes for liquid index strikes. Place a limit order at mid-market; it often fills within 30 seconds if the market is normal. For illiquid strikes, may need to give up a paisa or two.