Besides the broker's commission, the bid/ask spread is the only transaction costs incurred by the trader, and fortunately, bid/ask spreads on option contracts have tightened significantly over the past several years. This is particularly true for longer term contracts. For buy-side traders, this is wonderful because options are being priced with over-precision as a result of market maker competition (and active participation in the market). This allows an individual trader to navigate the market with greater speed and at a lower cost.
How can you take advantage of tight spreads besides getting cheaper market-order fills? Depending on your trading strategy and broker commission, you have greater flexibility to enter/exit positions, while paying less than 1% for the transaction. This facilitates opening a multileg option trade without having to worry about paying a significant amount of money to exit the trade.
Determining the 'fair market value' of an option is really difficult and the black-scholes model is not a holy-grail. As a result, when you see a contract that looks really inexpensive and the bid/ask spread is less that 5% of the value of the bid, then do not be afraid to enter the position. Mathematical models and fierce competition among market makers has empowered individual traders to purchase contracts at a low cost, so take advantage of it. Stay smart and trade safe!
Take a look at today's long trade candidate:
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