Futures For You by Carley Garner
SPLITTING THE BID?
Option traders often talk about “splitting the bid” or “midpoint”; what are they referring to?
All markets, whether we are talking about cars, houses, groceries, stocks, currencies, futures, or options, have two prices at any given time. There is a price at which an asset can be purchased and one at which it can be sold. In the world of trading, the difference is known as the bid/ask spread. The spread between the two prices is the compensation that the executor requires to accept the risk involved in making a market.
For instance, your local grocer buys products to stock his shelves at a wholesale price, only to turn around and sell it to you at a retail price. The difference between the price that he pays for items and what he sells it for is referred to as the margin in retail, identical to the bid/ask spread in the financial markets. The grocer is accepting the risk of not being able to sell the items purchased at wholesale and therefore must charge a markup in order to compensate him for his efforts.