The bid and ask are two sides of an options contract price. The bid price is the highest price a buyer is willing to pay to purchase an options contract. The ask price is the lowest price a seller is willing to accept to sell an options contract. A buyer-initiated trade will result in a purchase closer to the ask side of the spread, while a seller-initiated trade will result in a sale closer to the bid side of the spread.
The difference in price between the bid and ask price is called the bid-ask spread, and it represents the immediate cost of making a transaction. For example, if the bid is $1.00 and the ask is $1.10, the bid-ask spread is $0.10. If an options trader is making two transactions (say, a collar), the immediate transaction costs are double.
A narrow bid-ask spread indicates a more liquid market, while a wide bid-ask spread can indicate lower liquidity. Most options do not get traded very frequently, and often the bid-ask spread can be quite wide for low-volume options. Options close to the market price ("at-the-money") and close to expiration tend to be most highly traded, resulting in the narrowest bid-ask spreads.
When entering a limit order in between the bid and ask prices, it is common to refer to the mid-point of the bid and ask prices as the "fair" or "mid" price for the option, which is also a common starting point for negotiations and order placement.
In Market Chameleon's individual options and options chains, we display current bid and ask prices as well as the mid-point. We also show the bid-ask spread ratio as a percentage, which is the bid-ask spread divided by the mid-price of the option. This is very useful for gauging whether an option is too expensive to trade due to transaction costs.