- How the Bid-Ask Spread and Size Relate to Liquidity
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Understanding the Bid-Ask Spread
- The Bid is the price where you can sell
- The Ask is the price where you can buy
The bid will always be displayed on the left and the ask will always be displayed on the right:
This means that someone is willing to pay $1.00 for a security and someone is attempting to sell the security for $1.10.
Understanding the Quoted Size
2 x 7
For options, the size represents the number of contracts. Here a size of 2 represents 2 option contracts.
20 x 50
Here someone is willing to buy 20 contacts for $1.50 per contract and some is willing to sell 50 contracts for $1.55 per contract.
How the Bid-Ask Spread and Size Relate to Liquidity
Bid 2.10 x 2.15 Ask
Size 435 x 650 Size
In this example, if the bid-ask spread is tight (very close together) and there is a large amount of size on both sides of the market. Something that has good liquidity (is liquid) will always have a narrow bid-ask spread and a large number of contracts on both the bid and the ask.
Bid 1.50 x 2.10 Ask
Size 4 x 9 Size
In this example, the bid-ask spread is very wide and there aren't very many contracts on either side of the market. Markets that have poor liquidity are not ideal trading environments.
As a whole, you want to trade in markets with good liquidity that offers the trader the ability to get in and out of trades when you want or need to.