Why American Option Bid–Ask Spreads Can Differ by Moneyness

Summary

The document asks why at-the-money American calls and puts may have wider bid–ask spreads than their out-of-the-money counterparts. It contrasts this with European options, where put–call parity links call and put values, and observes that American options instead have inequality bounds because early exercise makes the contracts distinct. The post seeks a financial explanation for the spread pattern.

The author later suggests comparing spreads with option time value rather than comparing absolute spread amounts, and notes that the question needs further review. No explanation, market data, or analysis is supplied, so the proposed pattern and its cause remain unverified. The discussion is best read as a question about interpreting American option liquidity and pricing; it does not establish that moneyness alone causes the observed spread difference or offer a trading method.

Key ideas

• American options can differ because early exercise prevents European put–call parity from applying in the same form.
• The post asks whether moneyness explains differences in bid–ask spreads for American calls and puts.
• Comparing spreads relative to time value may be more informative than comparing absolute spread amounts.
• The document provides no market evidence or resolved explanation.

Tags

# The wider bid-ask spread of in-the-forward American option


# The wider bid-ask spread of in-the-forward American option












Why is the bid-ask spread of a in-the-forward/money American call (put) much larger than the out-of-the-forward/money American put (call)? I suppose the answer to the same corresponding question regarding the European option would be the put-call parity which makes one equivalent to the other. But there are only inequality bounds for the American put and call, implying that the two are distinct instruments. I suppose my rationale for the European options does not hold. What is the true financial rationale?

Edit: We ought to look at the ratio of the bid-ask spread to the time value rather than the absolute value of the option. I need to review the question.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.