Many people are trying to develop a profitable stock option trading strategy. Very often everything looks fine until a trader starts to apply the strategy for real trading. In one or two months a trader discovers that his trading capital is much smaller than it was expected. Why? Because of bid-ask spreads.

A trader can buy options at an ask price and sell it at a bid price. It is extremely important for option trading. Bid-ask spread can be 100% or more.

Here we present a simple equation which relates the option price and bid-ask spread. We analyzed many options for different time periods and found that the option spread becomes smaller when an option price becomes larger. A typical dependence of a spread on an option price is shown on the figure.

The average values of spreads can be described by the equation:

Spread (%) = 23.6 / P ^ 0.64

where P is the option price in $. This line is shown in red on the figure. The option spread is defined as

Spread = (Ask - Bid) / P * 100%

This equation can be useful for estimation of a profitability of option strategies. The next table shows some typical values of option spreads for various option prices.

One can see that option spreads are much larger than stock spreads and one has to take them into account during statistical analysis of the option trading strategies.