An option's last traded price may not be available for the quantity a participant wants to buy or sell. The bid-ask spread and available market depth affect entry, exit, stop execution and the real reward-to-risk relationship.
Read bid and ask, not only last price
The last trade can be old or unusually small. The current bid shows where buyers are willing to act and the ask shows where sellers are offering, while depth shows the visible quantity at several prices.
Convert spread into rupee impact
A wide spread multiplied by lot size and quantity can consume a meaningful part of the planned reward. Include likely entry and exit slippage when sizing the position.
- Absolute spread
- Spread as a percentage of premium
- Visible depth
- Planned quantity
Expect liquidity to change
Liquidity can improve near active strikes and deteriorate during fast markets, far strikes or certain expiries. An instrument that was liquid at entry may be harder to exit after conditions change.
Use order choice carefully
Limit orders can control price but may not execute; market orders prioritise execution but can create slippage. The decision depends on urgency, depth and the risk of remaining in the position.
Measure execution quality before increasing quantity
Record the spread, visible depth and expected price impact for the exact quantity. Divide the spread by premium to compare contracts with different price levels; the same rupee spread can represent very different percentage costs.
Check both entry and likely exit conditions. A contract may appear liquid near the market but become thin after the underlying moves and the strike becomes far from active trading.
- Spread in rupees
- Spread as premium percentage
- Depth near the order
- Exit-liquidity scenario
Include slippage in the risk and review
Add a realistic execution allowance to the entry-to-stop calculation before deciding quantity. If expected slippage consumes a large share of the planned risk, the contract or order size may not fit the strategy.
After exit, compare intended and realised fills. Repeated slippage is a measurable cost that should change contract selection, order type or maximum quantity.
- Planned fill
- Realised fill
- Total price impact
- Required size adjustment