Bid/Ask Spread Question

Quote from MechTrade:

Thanks for another great reply.

You made it easy to see how other MM's jump in and make better B/A's (both sides simultaneously) which creates competition.

But as a retail trader who only wants to make either a Bid or an Offer (not both), and the quote is your ultra-wide 3.00 Bid at 4.00, is it really worth my time to Bid 3.05 or Offer 3.95?

Since I'm only competing on one side of the trade, wouldn't it be better for me to just move onto a different underlying where the B/A spread is already tight?

And if that is the case, isn't it to the MM's detriment to attempt to maintain the ultra-wide spread that only a retail trader in full dementia might step into?

Thanks again.
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As a MM, I want to post the lowest bid and highest offer (i.e. the widest bid/ask spread) I can get away with. If I can bid 3.00 and offer 4.00 on those 105 XYZ calls, and no other market maker does better than that, that's great for me. It's great because Joe Blow - whose brother heard from the bartender that XYZ is going straight up - may just put in a market order to buy those calls, not looking at or caring about how wide the market is.

Of course, my REAL market is much tighter than that. If Joe is savvy enough to put in a 3.90 bid, I'd sell him those calls at 3.90. If he put in a 3.60 bid, I'd probably sell there. But why should I tip my hand if I don't have to?

If you're trading in and out, it's generally wise to avoid illiquid options with wide bid/ask spreads. But if you're spreading against something liquid or just making a long-term bet, you can always determine what price you're willing to pay or sell at, put in your bid or offer, and see what happens. You'll find that the REAL bid/ask spread is often quite a bit tighter than the one shown.
 
Quote from dmo:

If you're trading in and out, it's generally wise to avoid illiquid options with wide bid/ask spreads. But if you're spreading against something liquid or just making a long-term bet, you can always determine what price you're willing to pay or sell at, put in your bid or offer, and see what happens. You'll find that the REAL bid/ask spread is often quite a bit tighter than the one shown.
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Hey DMO... That is the explanation I needed. You just put the hay down where the goats can get to it!

Some people don't mind haggling while others like me find that haggling is a hell of a big waste of time.

MMs are exactly like Car Dealers in that some of them advertise a price very close to their REAL bottom line, while other dealers adopt the strategy of waiting for "Bubba Gump" to walk in the door and trying to see how much is in his billfold before quoting a price.

Thanks again. You'd think that someone as old as me would have gained enough insight into simple human nature that I would avoid "Aw Crap" moments like this.

Which reminds me:

Two guys are drinking in a bar.

One says, "Did you know that Elks have sex 10 to 15 times a night?"

"Aw crap..," says his friend, "and I just joined the VFW!"

Mech
 
Quote from dmo:



Of course, my REAL market is much tighter than that. If Joe is savvy enough to put in a 3.90 bid, I'd sell him those calls at 3.90. If he put in a 3.60 bid, I'd probably sell there. But why should I tip my hand if I don't have to?
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hey dmo, 3.10 at 3.90 500 up, my market they trade at 3.90

YDD
 
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