A Penny Here, A Penny There on AAPL

One of the more difficult problems with which to deal for an options trader has historically been the broad bid-ask spreads quoted for options. Experienced traders have routinely negotiated the bid-ask spreads downward with varying success when trading individual positions, but the non-economic price has been the significant effort and time required to achieve these negotiated results.

Beginning in January 2007, CBOE initiated a Pilot Program to reduce bid-ask spreads to as low as 1 cent. As of February 28th of this year, there are currently 360 in the series (including such big names as Apple (AAPL), Microsoft (MSFT) and more) quoted in these penny increments. CBOE maintains an Excel file of option series currently included within this “Penny Pilot” program at: http://www.cboe.org/hybrid/pennypilot.aspx

Because option positions are frequently constructed with several individual legs, the impact of the ability to trade with tighter bid-ask spreads can have significant impact on the aggregate slippage of positions. Combined with the falling commission rates resulting from the increasingly intense completion amongst brokers specializing in options, significant trading efficiencies have resulted.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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