Options market liquidity.


October 24, by Bret Kenwell Liquidity plays an important role in all markets.

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No problem. If you have money in the market and need it out, you could have it that same day depending on the account and time options market liquidity day. Even worse, say you need to sell your home to raise cash. One could have their home up for sale for months — even at attractive prices — and still not get a worthy bid on the property.

Real estate is an illiquid asset.

Why Liquidity Is So Important in the Options Market

But there are subtle nuances in the market where liquidity plays a role. The options market exacerbates these principles and makes liquidity even more important.

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But as liquidity dries up, that spread widens dramatically. It makes it almost impossible to exit at a good price.

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When volatility spikes or volume declines, that spread tends to widen rather than shrink. Say that option goes from at-the-money to in-the-money to deep-in-the-money.

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Rather than cashing in after making the right call, investors may face an even wider spread — even if volatility remains low. This can make exiting a position difficult given that the spread is wide and there will likely be less buyers and sellers at that particular strike.

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Even non-volatile holdings can have incredibly wide spreads. This can be especially true for deep-in-the-money options or options with far-off expiration dates.

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They can often times get a price somewhere in the middle. The lower the volume and wider the spread though, the harder it gets.

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The more traders in the strike, the easier it is to get the price you want. If you have 2 people on a soccer field, a perfect 50 yard pass will be difficult.

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If there are 10 people 5 yards apart, the passes are easier. That scenario can be thanks to low liquidity and it can be a dangerous scalpel to our performance. The options market liquidity would be to simply look at the options market liquidity.

By Chad Langager Updated Mar 1, An option is a financial instrument that gives the holder the right to purchase shares in a options market liquidity at a certain set price strike price before a set date known as the expiration date. Options, however, trade far less frequently than other financial instruments such as stocks or bonds. This can make it difficult for investors to enter into the option that they want. The best way to measure option liquiditytherefore, is to look at two factors: the daily volume and the open interest. The daily volume of a specific option contract is simply a measure of the number of times that contract was traded on a particular day.

Investors can also look at the open interest, which shows how many open contracts are currently being held by investors. They can also look at volume to get a sense of how many contracts have changed hands in the current session. When these numbers are higher, liquidity tends to be higher as well.

Why Options Are Rarely Exercised (Options Traders MUST Know This)

When these numbers are low — and can be zero, for the record — then liquidity tends to be pretty tight. Keep in options market liquidity that even with lots of volume and plenty of open interest, spreads can still be wide if the underlying asset is volatile. In a nutshell, there are a lot of contributing factors to liquidity.

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For tight, small moves though we need high liquidity to get in out and quickly and at good prices. Luckily, Option Party has a few filters we can use to take advantage.

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Combined with its overhauled implied volatility filters and investors can really do their best to ignore these low liquidity plays. Read More.