Bid-Ask Spreads and Trading Activity in the S&P 100 Index Options Market

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Abstract
This paper examines the cross-sectional distribution of bid-ask spreads in the S&P 100 index options market. Cross-sectional differences in bid-ask spreads are found to be directly related to differences in market-making costs and trading activity across options. We also examine the relation of an option's bid-ask spread and trading activity to the spread and trading activity in other options. Call option trading activity is inversely related to the call option bid-ask spread but positively related to the spread of the put option having the same strike price and maturity, and vice versa. These findings suggest that traders view call and put options as substitutes.

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