How Wide Is Too Wide for a Bid-Ask Spread When Selling a Covered Call?

The Short Answer: Know Your Spread Threshold Before You Trade

A bid-ask spread wider than 10% of the option's midpoint price is generally too wide for most retail covered-call sellers. If the spread eats more than $0.10 per contract dollar of premium you expect to collect, you are giving away too much edge to the market maker before the trade even starts. As a practical rule, stick to options where the spread is $0.10 or less on low-priced options and no more than 1–2% of the underlying stock price on higher-priced names.

Why the Bid-Ask Spread Matters More Than Most Traders Think

When you sell a covered call, you want to collect the highest net premium possible. The bid-ask spread is the invisible tax on every options trade. Market makers post two prices: the bid (what they will pay you) and the ask (what they will charge a buyer). When you sell, you almost always fill at or near the bid — the lower number.

Consider a simple example. You own 100 shares of Apple (AAPL), currently trading at $195. You look at the 30-day $200 strike call. The bid is $1.40 and the ask is $1.80. The midpoint is $1.60. If you sell at the bid, you collect $140 per contract. If you could fill at the midpoint, you collect $160. That $20 difference is 12.5% of the midpoint — a meaningful drag on a strategy where monthly premiums of 1–3% of stock value are considered solid returns.

The Options Industry Council (OIC) notes that liquidity — reflected directly in tight bid-ask spreads — is one of the most important factors retail traders should evaluate before entering any options position. Wide spreads signal thin markets, and thin markets mean your limit orders may not fill, or you may have to chase the price lower to get done.

How to Measure Spread Width the Right Way

Absolute dollar width alone does not tell the full story. A $0.50 spread on a $50 premium is fine. A $0.50 spread on a $0.60 premium is a disaster. Use the spread-to-midpoint ratio instead:

Spread-to-Midpoint Ratio = (Ask − Bid) ÷ Midpoint × 100

Here are three real-world examples using current-style pricing:

1. AAPL $200 call, 30 DTE: Bid $1.40 / Ask $1.60. Spread = $0.20. Midpoint = $1.50. Ratio = 13.3%. Borderline — try a limit at the midpoint and see if it fills.

2. SPY $510 call, 21 DTE: Bid $2.85 / Ask $2.90. Spread = $0.05. Midpoint = $2.875. Ratio = 1.7%. Excellent — fill near mid with confidence.

3. NVDA $950 call, 14 DTE: Bid $8.20 / Ask $8.80. Spread = $0.60. Midpoint = $8.50. Ratio = 7.1%. Acceptable given NVDA's high implied volatility, but still worth placing a limit at the midpoint.

As a general framework: under 5% ratio is good, 5–10% is acceptable with a limit order, above 10% is a warning sign, and above 20% means you should either skip the trade or move to a more liquid strike or expiration.

What Causes Spreads to Widen — and When to Expect It

Spreads widen for predictable reasons. Understanding them helps you time your trades better.

Low open interest and volume: If fewer than 100 contracts of open interest exist at a given strike, market makers widen their spread to compensate for the risk of holding an illiquid position. CBOE data consistently shows that the most liquid strikes — typically at-the-money and one strike out-of-the-money on large-cap names — carry the tightest spreads.

High implied volatility events: Earnings announcements, Federal Reserve decisions, and major economic data releases cause implied volatility to spike. Market makers widen spreads to protect themselves from sudden moves. FINRA reminds retail investors that options pricing changes rapidly around these events, and the spread you see at 9:35 a.m. may look very different by 10:00 a.m.

Small or thinly traded underlyings: Selling covered calls on a $12 regional bank stock or a micro-cap ETF will almost always produce wide spreads. Stick to names with average daily options volume above 10,000 contracts. SPY, AAPL, MSFT, and NVDA routinely trade millions of contracts daily and carry some of the tightest spreads available to retail traders.

Time of day: Spreads are typically widest in the first and last 15 minutes of the trading session. The best fills usually come between 10:00 a.m. and 3:30 p.m. Eastern time when liquidity is deepest.

The Real Risks of Trading Wide Spreads

Wide spreads are not just a minor inconvenience — they can turn a profitable covered-call strategy into a losing one over time.

Slippage compounds: If you sell 12 covered calls per year on a thinly traded stock and give up $0.30 per contract on each trade versus the midpoint, that is $360 per year per 100-share lot in pure slippage. On a stock paying $1.50 per contract in premium, you have just surrendered 20% of your gross income before commissions.

Difficult to close early: One of the best risk-management moves a covered-call seller can make is buying back the short call when it has lost 50–80% of its value, then reselling a new one. The SEC's investor education materials note that the ability to exit a position quickly and at a fair price is a core component of managing options risk. Wide spreads make early buybacks expensive, trapping you in positions longer than you want.

Misleading premium yields: A wide spread can make a premium look attractive on paper. If the midpoint shows $2.00 but you can only realistically sell at the $1.60 bid, your actual yield is 20% lower than the headline number suggests. Always calculate your expected return using the bid price, not the midpoint, as your conservative estimate.

For Canadian investors, the CRA treats premiums received from covered calls as either capital gains or income depending on your trading frequency and intent — but either way, slippage reduces the taxable gain you actually realize, so the tax benefit of a wide-spread trade is also smaller than it appears.

Practical Rules for Getting Better Fills on Covered Calls

You do not have to accept the bid. Here is how to improve your fills systematically.

Always use limit orders: Never sell a covered call at market. Place your limit at the midpoint first. If it does not fill within 5–10 minutes, move your limit $0.05 toward the bid. Repeat until filled or until you decide the trade is not worth doing at the available price.

Check open interest before you look at premium: Sort your options chain by open interest, not by premium yield. A strike with 5,000+ contracts of open interest is almost always going to give you a tighter spread than one with 200 contracts.

Favor monthly expirations over weeklies on less liquid names: Standard monthly expirations (the third Friday of each month) concentrate liquidity. Weekly expirations on anything other than SPY, QQQ, AAPL, and a handful of other mega-caps often carry spreads 2–3 times wider than the nearest monthly.

Trade during peak hours: As noted above, mid-morning to mid-afternoon Eastern time gives you the best chance of a tight spread and a quick fill.

Use the 10% rule as your hard stop: If the spread-to-midpoint ratio exceeds 10% and your limit at the midpoint does not fill after two attempts, walk away. There will be another opportunity next week. Forcing a trade through a wide spread is one of the most common and costly mistakes retail covered-call sellers make, according to OIC educational materials on options liquidity.

What is a good bid-ask spread for a covered call?

A spread-to-midpoint ratio under 5% is considered good for covered-call sellers. In dollar terms, this often means a spread of $0.05 to $0.15 on options priced between $1.00 and $5.00. Highly liquid names like SPY and AAPL regularly meet this standard on their most active strikes.

Should I sell at the bid or try for the midpoint on a covered call?

Always place a limit order at the midpoint first and give it 5–10 minutes to fill. On liquid options, midpoint fills are common, especially during mid-session hours. If the order does not fill, move your limit $0.05 at a time toward the bid rather than jumping straight to the bid price.

Does a wide bid-ask spread mean the option is overpriced?

Not necessarily — a wide spread usually means the option is illiquid, not that it is mispriced. Market makers widen spreads to compensate for the risk of holding positions in thinly traded contracts. High implied volatility can also widen spreads around earnings or major economic events without the option being overpriced.

How do I find covered call options with tight spreads?

Filter your options chain for strikes with open interest above 1,000 contracts and daily volume above 200 contracts. Focus on large-cap stocks and major ETFs like SPY, AAPL, MSFT, and NVDA, which consistently have the tightest spreads in the market. Trading standard monthly expirations rather than weeklies also helps on less liquid names.

Can a wide spread wipe out my covered call premium?

On low-premium options, yes. If you are selling a call for $0.40 and the spread is $0.30 wide, you may only net $0.10 to $0.25 per share after slippage — a fraction of the headline premium. This is why calculating your return using the bid price, not the midpoint, gives you a more honest picture of what you will actually collect.

Do bid-ask spreads affect covered call taxes in Canada?

The CRA taxes covered-call premiums as either capital gains or income depending on your trading pattern and intent, but the actual amount you report is based on what you received — the fill price, not the midpoint. Slippage from wide spreads directly reduces your taxable proceeds, which also means your after-tax return is lower than the midpoint premium would suggest.