TL;DR
- Wide bid-ask spreads quietly siphon off 5-15 % of your annual covered-call income if you trade weekly options.
- Stick to liquid underlyings with tight spreads, use monthly expirations for core positions, and leg in with limit orders at the mid-price.
- One extra cent of slippage on a weekly contract equals roughly 0.4 % drag on annual return-tiny until you multiply it by fifty-two weeks.
I lost a small fortune in 2008, but the real sting came later when I tallied what I had given away to the market makers. During that ugly stretch I was still selling calls on every bounce, desperately trying to claw back losses. I did not lose money because the stocks kept falling; I lost extra money because I accepted whatever price the screen flashed. On thinly traded options the bid-ask spread was fifty to eighty cents wide. Every time I hit “sell to open” I donated another slice to someone I never met.
That painful accounting session became the seed of today’s Cash Flow Machine rules. We still hunt for income, but we refuse to hand it over one cent at a time. If you trade covered calls and ignore the spread, you are doing the same thing. Let me show you how much it costs and how to keep it in your pocket.
The Hidden Tax on Every Contract
The bid-ask spread is the difference between the price at which you can sell (the bid) and the price at which you can buy (the ask). In liquid names like AAPL or SPY, that gap is often a penny or two. In smaller stocks-or in weekly options-it can be ten, twenty, or even fifty cents. You pay half of that spread every time you enter or exit, because your fill lands closer to the bid when you sell and closer to the ask when you buy.
Think of it as a toll booth: you cannot avoid it completely, but you can choose how many tolls you cross. The more often you trade, the bigger the drag. A weekly write on a $35 stock with a three-cent spread sounds harmless. Run the math across fifty-two weeks and you discover the toll equals roughly 4.4 % of your annual premium income. That is real money, and it goes straight to the market maker.
Liquidity Is King-Here Is How to Measure It
I look at three numbers before I touch any option: open interest, daily volume, and the bid-ask width as a percentage of the strike price. Open interest above 1,000 contracts and daily volume above 200 are my rough filters. Then I convert the spread into basis points: a two-cent spread on a $40 strike is five one-hundredths of one percent. Anything above fifteen basis points gets crossed off the list unless the premium is exceptional.
Two free tools make this quick: the options chain on cashflowmachine.io/covered-calls and the liquidity heat map in the @coveredcalls YouTube channel description. Both update intraday so you are not guessing.
Time to Expiration Changes Everything
Weekly options tempt us with fat premium, but they also expose us to the spread fifty-two times a year. Monthly options cut the toll booths down to twelve. On the same underlying, a monthly contract usually has a tighter spread anyway because more participants crowd into the same expiration. Net effect: lower frequency and lower per-contract cost. On my core holdings I sell the monthly just out-of-the-money, then roll at twenty-one days to expiration. That schedule balances time decay against spread drag.
Use Limit Orders Like a Sniper
Market orders are a gift to the middleman. Instead, place a limit order at the mid-price and wait. In liquid options your fill arrives within seconds during normal hours. In thinner names I will split the difference-start at the mid, then walk a nickel toward the bid if I have to. Even on my largest position, Tesla, I never give up more than two cents. Over the last three years that single rule has added almost three percentage points to my annual return. Compounded over decades, that is the difference between comfortable and wealthy.
When Tight Spreads Are Impossible
Sometimes you want exposure to a name that simply does not trade enough options. In that case, move up the capital structure. Covered calls on an ETF that holds the stock (for example, QQQ instead of a thin Nasdaq name) usually solve the problem. If you insist on the individual stock, sell quarterly options instead of weekly. The open interest tends to stack in the quarterly series, and the spread compresses accordingly.
What is a good bid-ask spread for covered calls?
Aim for a spread no wider than five to ten cents on strikes under $100, or ten to fifteen cents on strikes above that. Convert it to basis points: under fifteen basis points is excellent; above thirty basis points is a warning.
How much does the bid-ask spread cost over a year?
One cent of slippage on a weekly contract costs roughly 0.4 % annualized. Multiply by the actual spread you accept and the number of trades you place. Weekly traders often give up 5-8 % of gross premium to spreads alone.
Does the spread matter on long-term LEAPS?
Far-dated options usually have wider dollar spreads, but the spread as a percentage of the premium is smaller. Because you trade them infrequently, the annual drag is modest. The bigger risk on LEAPS is liquidity-make sure open interest is still in the hundreds.
If spreads are quietly eating your lunch, tighten the menu. Stick to liquid underlyings, favor monthly or quarterly expirations, and never accept the first price the screen shows. Do that, and every cent you keep compounds in your favor instead of someone else’s. Ready to see the system in action? Join the next mentorship cohort here.
This is education, not financial advice. Past performance is not indicative of future results. Consult a qualified advisor before making investment decisions.