themselves a better chance to make money.
You might see narrower bid/ask spreads
for options on stocks that are actively
traded and have narrow bid/ask spreads
themselves. Those options may have open
interest in the hundreds, or even thousands,
so there are potentially lots of participants
willing to buy and sell that option.
That said, when you trade, you want to
get the best price—meaning a lower price
when you’re trying to buy an option, and a
higher price when you’re trying to sell. If
you see a narrow bid/ask spread for an option, say, $0.02 or $0.01, you can buy or sell
that option and give less edge to the market
maker. Combined with high open interest,
an option doesn’t get more liquid than that.
A wide bid/ask spread might signal
caution is prudent. For example, if it’s $0.10
or more and has low open interest, you may
have a tough time getting filled in between
the bid/ask spread, and may have to give
the market maker more edge when you do
a trade. That increases trading costs above
Find Your Edge
When open interest is low and bid/ask
spreads are wide, you might consider moving on to the next trade. Chances are no one
wants to play unless they get an edge for taking your trade. So, take your ball and go play
somewhere else. —Words by THOMAS PRESTON
Deciphering the Data
BIG IDEA: WERE THE TRADES CALLS OR
PUTS? WAS A SALE AT THE BID OR BELOW,
AT THE ASK OR ABOVE, OR BETWEEN
THE BID AND ASK?
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the
author and may not be reflective of those held by
TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 37, #1– 2.
• What can you gain from knowing the details of every trade
that took place in an underlying during a given trading day? At
a high level, you may get a feel for volume (the size of trades)
and momentum (the flow of trades). Wondering if sentiment
is bearish or bullish? If you notice a lot of trades above the
ask, then sentiment may be leaning toward the bullish side. If
trades are taking place below the bid, sentiment may be more
bearish. You may notice some unusual trading activity; maybe
there were some large orders at a specific price. But it’s a lot of
data that scrolls very quickly. The “Options Time & Sales” tool
in the thinkorswim® platform from TD Ameritrade can help
you organize this data and make sense of all the little bits.
For the latest release
notes and thinkorswim
how-to videos, go to
Source: thinkorswim from TD Ameritrade. For illustrative purposes only.
GEAR HEAD • SEASONED
1 – From the Trade tab,
select All Products and
enter the symbol of the
2 – Expand the Options
Time & Sales section.
There’re two categories
and “Time.” Today’s
biggest finds the largest
call and put trades for
the current trading day.
MAKE SENSE OF
OPTIONS TIME &
Time lists all the trades
3 – The data is color
Blue = calls
Purple = puts
Red = trade took place
at bid or below
Green = trade took
place at ask or above
Yellow = trade took
place between the bid
Some traded options
have a shaded back-
ground. This shows if
an option was in the
money (ITM) or out of
the money (OTM).
4 –Some columns can
be sorted, such as quantity, price, delta, and
implied volatility (IV).
Data is color