A Case Study on the Volatility of Bid-Ask Spreads

On this episode, we do a deep dive into the volatility of bid-ask spreads with four case studies, and discuss how you can use automation to address pricing anomalies.
A Case Study on the Volatility of Bid-Ask Spreads
Kirk Du Plessis
Jul 1, 2021

On this episode, we take a close look at the volatility of bid-ask spreads with four unique case studies. We invited our Chief Market Strategist, Ryan Hysmith, who dives deep into research we did recently on bid-ask spreads.

If you think you understand bid-ask spreads and their volatility, you will have a different perspective after listening to this show.

Be sure to check out our blog on Bid-Ask Spread Volatility.


The bid-ask spread is the price difference between the bid price and the ask price for a security. The bid price is the price a buyer is willing to pay for a security, and the ask is the price a seller is willing to sell a security.

Many factors impact the bid-ask spread, such as liquidity, supply and demand, market makers, and block trades.

The goal is to trade tight bid-ask spreads. Tight spreads enable you to get in and out of positions easily without much slippage between contracts.

We’ve captured terabytes of data to identify bid-ask spread anomalies and help you understand how bid-ask spreads work.

Case Study #1 - TLT Iron Condor

The data for the case study is from May 21st, 2021. TLT is a popular bond ETF with high liquidity.

We captured the bid price and the ask price for every moment after 9:45 and collected over 8,000 tick-value data points throughout the day. More than 31,000 price quotes were recorded for the net bid-ask spread of the iron condor.

TLT 135 put bid-ask price chart for May 21, 2021
TLT 137 put bid-ask price chart for May 21, 2021
TLT 139 call bid-ask price chart for May 21, 2021
TLT 141 call bid-ask price chart for May 21, 2021
TLT iron condor net bid-ask price chart for May 21, 2021

You'll notice there was a large widening of all spreads just after 9:45 that morning, which is not uncommon when the market opens.

The short call, long call, and long put legs all move in lockstep during the day, but short put’s price was all over the place. It was bid up and down with spreads widening and collapsing in one or both directions.

The volume on this contract was similar to the others, but it was much more erratic than the other legs.

What does this mean? Volume is not the only factor that impacts bid-ask spreads.

It is also important to note that the bid-ask spread of one contract in an iron condor caused the entire position’s bid-ask spread to experience high volatility.

Case Study #2 - SPY Iron Condor

One of our beta users saw a pricing anomaly in a SPY iron condor, despite the fact that the underlying had a relatively calm day. We took a closer look at the tick value data and discovered some pretty interesting insights.

The May 24th 397 put contract recorded a bid of $.78 cents and an ask of $2.10 for a mid-price of $1.44.

Surprisingly, even a large, liquid ETF's individual contracts can see wide bid-ask spread anomalies. The anomalies may last for ticks, or seconds, or more, and they can balloon the bid-ask spread from a few cents to a dollar or more.

The put contract's spread was a few cents most of the day before suddenly ballooning. Just one leg of the iron condor pushed the position into losing territory, triggering the stop loss.

The implication here is that anomalies occur and pricing temporarily volatile, even on "calm" days. One contract can affect the pricing of the entire position and trigger an order.

Case Study #3 - DIA Iron Condor

The third case study involved a DIA iron condor that closed at the first automation interval 15 minutes after the market opened. Pricing on or around the opening can be especially erratic.

The poor pricing on this iron condor occurred because one of the legs had zero bids. We pulled the bid-ask spreads from 9:30 to 10:00 EST for the four legs of the position.

DIA 331 put bid-ask price chart for June 3, 2021
DIA 336 put bid-ask price chart for June 3, 2021
DIA 351 call bid-ask price chart for June 3, 2021
DIA 356 call bid-ask price chart for June 3, 2021

The different legs in the iron condor were pretty stable. At 9:45, though, there was a massive decline in DIA’s options prices that affected all of the contracts.

It was a real pricing anomaly, where the bid-ask spread changed dramatically. All contracts experienced short-term, volatile price movement.

Case Study #4 - SPY Put Credit Spread

The fourth study involved a SPY put credit spread. A 55% profit target was triggered when the bot attempted to close the trade. During the process, the bid-ask spread widened, resulting in a fill with only a 12% profit.

This case study is an example of how options contracts can experience anomalies and volatility while the underlying security's price is relatively stable.

We captured all the bid-ask ticks for that morning, from 9:30 to 10:15 Eastern for both contracts in the spread.

SPY 369 put bid-ask price chart for June 1, 2021
SPY 385 put bid-ask price chart for June 1, 2021

There was a four-second interval where the spreads exploded. The bid-ask on the 385 put went from a few cents to almost $.50, while the spread on the 389 put went from 2 cents to almost $4.50!

How To Address Anomalies When Autotrading

Price anomalies happen much more frequently than most traders realize. Unless you stare at your screen all day, it is almost impossible to observe this unique price action.

How would you address these bid-ask anomalies if you were manually trading?

You would probably filter for liquidity and favorable pricing before entering a position. Eventually, you'll find yourself filtering based on your own investor and psychological biases.

With autotrading, you can clearly define your decisions, steps, and logic into an automated process.

You'll need to layer logic into your automated trading. We take a lot of decisions for granted. There are a lot of things we do as manual traders that can translate into automated trading.

SmartPricing and Bid-Ask Spreads

Now that we understand the volatility of bid-ask spreads more, how can we build automated strategies to address the anomalies?

There are tools in the autotrading platform to trade around volatile markets.

The new SmartPricing feature allows you to progress through the bid-ask spread, testing different pricing options and ultimately accept the optimal price.

SmartPricing should help with better fills than you might get just trying to close at the mid-price.

How many times have you placed an order that has sat there for forever or placed an order and it got filled immediately? How much more could you have benefited from the price discovery of SmartPricing, where you're logically traversing the bid-ask spread?

It's important to think about the bid-ask spread for not only entry and exit, but also the time during the trade and how the volatility of a bid-ask spread impacts pricing.

Trader Q&A

“Hey, Kirk. This is Jonathan. I've been trading for about three months now. I was wondering what your thoughts were on 0 DTE trades. For example, putting on a 10 Delta credit spread on SPX for possibly a $25 profit and risking $500. I know that risk to reward was pretty high. Would the high probabilities balance that out? Thanks.”

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