In a Vertical Put Credit Spread, what causes the wide Bid-Ask difference?

[etihan]

What would be the main reason for an option chain to have a wide bid-ask spread difference? The GUSH ETF I am looking at (exp. July 15) has a crazy wide difference. This is a stock with high IV and a significant amount of volume. Questions I have is:

1- What factors directly affect the size of spreads on Vertical Put Credit Spreads?
2- If the underlying price on the expiry date is above my strikes, why does it matter if the spread between the bid and ask price is high?

Thanks.

 

[Damanuelman]

Market makers or traders will only transact at those prices. You can see the last price traded it should be close to the Mid price. Spy is usually about 1 to 2 cents wide spread and during times of illiquidity or when the market is really volatile spreads widen as less traders are willing or can trade really.

Seeing the liquidity dry up in the order book is actually pretty scary to me, I don’t trade big enough for it to effect me though as ES is usually one tic but I have seen the spreads widen to 4 or 5 ticks. In more illiquid options on stocks I’m sure it gets even wider so make sure to limit order not market order or you will see an instant loss and it will be a big one.

 

[BlueWaterSailor]

What would be the main reason for an option chain to have a wide bid-ask spread difference? The GUSH ETF I am looking at (exp. July 15) has a crazy wide difference. This is a stock with high IV and a significant amount of volume. Questions I have is:

1- What factors directly affect the size of spreads on Vertical Put Credit Spreads?
2- If the underlying price on the expiry date is above my strikes, why does it matter if the spread between the bid and ask price is high?

Thanks.

High IV = high VRP (the variable risk premium that MMs add to the spread), so that's not exactly a benefit. As far as volume, just for comparison - GUSH barely does 1M/day, and has an O/I of well under 100 at the strikes you want; SPY did 64M+ in volume and has something like 50-100k O/I at strikes with a similar delta. Those B/A spreads make sense, at those levels.

WRT your 2nd question - you pay that haircut at entry (whether you receive less credit or pay a greater debit.) No matter what, you've paid it - so your P&L is that much less.