The minimum price increment for a contract; typically a penny below $3 and a nickel above, unless the class is in a penny pilot.
Tick size sets the floor on how tight a market can be. A nickel-increment contract can never quote better than five cents wide, which on a $0.50 option is a 10% round-trip cost before commissions.
This is why liquid products in the penny-increment-program are structurally cheaper to trade than otherwise similar names. When comparing two underlyings for a strategy, the increment regime often matters more than the headline implied-volatility difference.
Example: XYZ trades in nickels above $3. The 45-day $50 call quotes $2.30 / $2.35 (penny territory, one cent wide) while the $45 call quotes $6.05 / $6.15. Ten round trips in the deeper call cost $100 in spread that the near-the-money line would not.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
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