Option Day Trading Costs: Spreads, Fees, and Feasibility
Summary
This note considers the costs of buying SPY options near the market open and selling later in the day. It highlights explicit transaction charges and the bid-ask spread as separate drags on a trade. It also warns that option spreads may widen around the open and close, when market-maker quotes can be absent or less competitive, making an intraday break-even threshold dependent on actual execution conditions.
To assess feasibility, the answer suggests examining historical option bid-ask data and comparing trading costs with the underlying market’s daily drift. It offers no data or measured results, and its view that the approach is unlikely to work is an opinion rather than a demonstrated finding. The response also mentions buying calls after a company’s sharp decline as a different idea, but supplies no valuation method or evidence for that approach.
Key ideas
- Option day trades incur both transaction charges and costs from the bid-ask spread.
- Spreads may widen around the open and close, raising execution costs.
- Historical option quotes can help assess whether expected market movement covers those costs.
- The answer gives no empirical results to establish that the suggested intraday approach is feasible.
Tags
Full text
# transaction costs for day trading options # transaction costs for day trading options I want to day trade SPY options by buying at the open and closing the position later in the day, but I need to know approximately how far into the money the contract will have to be for me to break even on the two trades. In other words, how much it will cost to buy at the open and sell back later in the day. Presumably this depends on what broker I would be using and how many contracts I'm trading, but any specific examples and/or broker recommendations would be appreciated. ## Answer by abb (score 0) https://quant.stackexchange.com/a/38452 Yes, your problem is that you have your primary transaction costs for making the trade then you have to pay your taxes to the market makers through the bid-ask spread. I highly doubt your strategy will work. Another thing is that on the open and the close for options, typically market makers will not post quotes (or the spread will increase) because volatility increases at these times. As such the bid-ask spread can widen significantly thus hurting your trading strategy even more. However there’s a mathematical way to test if it’s feasible. One thing you could do is get a hold of the historical bid-ask on options then calculate the daily drift of the S&P500. If the drift is bigger than the average bid-ask spread then your strategy may be feasible. I’ll tell you right now it’s probably not - a weekly or monthly strategy however may be viable. A better strategy you could try would be purchasing call options on companies that have recently crashed in price. Obviously you’ll have to do research on the company to see if the crash is warranted. This strategy was employed by Cornwall Capital (one of the funds from the movie the Big Short) which actively sought underpriced options. One of their biggest successes was buying calls on Capital One after it crashed. Anyways do some research into that strategy and don’t use Black-Scholes as a proxy for valuing options if you’re going to try it.
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.