Abstract: The bid/ask spread is how market makers make their money, and some of them have made a ton of it. The last traded price is just the beginning and when it's actually time to execute a trade, one is faced with two prices, the bid price and the ask price. The bid price is the price that the market is bidding for one's stock or option. It is the price the market is willing to pay one for one's stock or for options if one wants to sell. The ask price is the price that the market is asking for in order to sell one stock or options. If one wanted to buy a single share or option immediately, then the ask price is the price one would expect to pay. The real measure of the bid and of the ask, and of the spread between the two, is in terms of implied volatility. The bid/ask spread for in-the-money options is wide because of the number of shares of the underlying that a market maker would have to execute as a hedge along with the lack of need to improve that market.
Publication Year: 2012
Publication Date: 2012-01-02
Language: en
Type: other
Indexed In: ['crossref']
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