Day-trading and liquidity

2

2infinity

I have a question regarding liquidity limits that one might be up against if one was opening a trade at the market open and closing it at the close of the day at the latest.

I'm trying to get an idea for how scalable a strategy is.

If I were focusing on underlyings with particularly high liquidity for options such as SPX, GOOG, AAPL, etc., would I be significantly at risk of experiencing slippage or being unable to sell out of my position if I wanted to trade 200 contracts a day for each stock? In other words, I would be looking to going long on calls or puts at market open for SPX in the amount of 200 contracts at the nearest in-the-money strike price. Would this be achievable and, if so, would I have trouble getting rid of the position on the same day?

By studying the option chains for the high-volume stocks, it's looking like I am going to run into a liquidity issue as the amount I mentioned would potentially be 20-40% of the daily volume so I'm trying to determine what the threshold is for scalability.

Another way to phrase my question would be: if I'm looking to purchase multiple contracts at market open that are in-the-money (nearest strike price) and then sell them when the contract price has risen a specified amount (or decreased a specified amount in the case of puts) or at market close -whichever occurs first- then what percentage of total daily volume could I realistically trade in?

Thanks and best regards
 
200 contracts won't be a problem. of the underlyings u named, GOOG has the smallest daily volume but it's still +13000. AAPL and SPX are in the hundreds of thousands.
 
Based on my experience doing similar trading, there isn't a problem with getting out of your position. The problem is getting out and making money, especially if the options are close to expiration. Time slippage gets worse and worse on thursday and friday before expiration, but if your direction was accurate and the price is moving rapidly you can still make money.

The scalability issue I have seen is this: I depend on limit orders and predicting price movements to profit on these trades. The larger your orders the larger the price movement is required to get out at your desired price. So for instance I have traded 1000s of Facebook contracts before, and watched the price of the underlying bounce off of my sell line multiple times before the entire sell order was met. It seems that both closing hedging positions and unwillingness to sell at the desired volume and for the theoretical option price work against you. The second factor isn't that bad however especially if the price of the underlying continues to move in the right direction.
 
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