by CareyAnn Peterson
What is the difference between the bid price and the ask price? On Trade Day, I frequently receive this question from our clients. When we teach you the Snider Method, we always tell you to look at the bid price when deciding which options to sell, but I commonly run into people asking what the difference between the two is. Hopefully, I can clear up any confusion.
The bid price is the amount that a trader is willing to pay for a security. Let’s say you would like to sell some stock that you own. If you look at the quote, you will typically receive the bid price, the amount that someone is willing to pay for the stock you own.
The ask price is the amount that a seller is willing to accept for their security. If you were trying to buy a stock or option, you would look at the ask price. The best way to remember is to look at the two prices and know that you are going to receive the short end of the deal. If you are buying you will always pay the higher number (the ask) and if you are selling, you will always receive the lower number (the bid). Since we only sell options in the Snider Investment Method®, you only need to consider the bid price when deciding which options to sell.
You may be asking yourself, why are their differences between the bid-ask prices and what determines the difference? The difference between these two numbers is actually called the Bid-Ask spread. The “spread” is driven by the supply and demand for that particular security. If the supply and demand for a particular security is high, you will see a smaller Bid-Ask Spread. If the interest in a security is low, you will see a bigger spread between the bid and ask prices. You can look at how heavily the security is traded by looking at the volume. If the volume is low, you will often see a bigger spread while if the volume is high, the spread might be miniscule. Hopefully you will now be able to distinguish between bid and ask prices!