Why are bid & ask spreads important?
The spread between the bid & ask is important in any type of trade. But it is especially important to consider when looking at unusual option activity. It helps you understand the urgency a trader may have when placing that particular trade. Let's look at an example:
The above screenshot is the trade log for $SGMS. This trader elected not to wait to get a fill at the midpoint and went ahead and bought 10,750 calls at the ask for $4.20. Now, if they tried to middle their order, say $4.05 and got filled, they could have saved potentially $161,250, but they didn’t. This leads us to believe they have high expectations for this trade, and saving $161k is chump change.
The other thing to consider is that the higher the spread the less likely this trade is a hedge, otherwise they would of waited for a better fill or split up the order into smaller chunks (these trades would be captured in our sweeps scanner).