Option volume and liquidity in smaller stocks

F

fielman

I have a profitable strategy on the DOW 30 stocks which is enhanced with the use of options.

I believe that this strategy will be even more profitable when I extend the universe to say the largest 500 stocks.

Can anybody give me an approximate idea where i can expect the liquidity do dry up in terms of the bid/ask spread i.e. +- stock number 300, 700 etc. Volume is not too important as I will trade many stocks options in small volume.

Thanks

S.A. trader
 
Depends on which options you are gonna trade - ATM, OTM, ITM. If OTM or ITM then how far in- or out-? Which expiry, front month, second month, back month, Leaps?

The liquidity dries up the further you go out- or in-the-money and further out in time.
 
Higher profitabilty comes from concentrating positions, not excessive and wasteful diversification. The larger-cap stocks can handle more money than you'll ever have.
 
Quote from fielman:

....when I extend the universe to say the largest 500 stocks.

Can anybody give me an approximate idea where i can expect the liquidity do dry up in terms of the bid/ask spread i.e. +- stock number 300, 700 etc. Volume is not too important as I will trade many stocks options in small volume.

Thanks

S.A. trader
More...

Hi Fielman. MTE right about ITM, ATM , OTM & further out in time. If you're doing doing small volume you could probably do any of the top 1000/3000 options products. Why you would want to do this, beats me.

kny 3 :cool: :confused:
 
Thanks for the advice guys. I will trade the 1 - 3 month options and close to the money options.

Nazzdack, you are confusing position sizing with more opportunities in a wider universe (1000 vs. 30 stocks).

It is more an investment model than a trading model. What I mean by that is that I will typically hold the options to expiry. By continuously (daily) assessing the market and taking a small position in the stock that represents an opportunity I am not only diversifying amongst stocks but also time. There is no difference in costs whether you trade 2 or 500 options (with IB)

This is a rule based model on the DOW 30 stocks which will be extended to the liquid option market ( 600 stocks??? )
 
It is easy to see where the volume drops off. I usually use a figure of about $50,000 in options traded per day as a cut-off.

The list I attached shows those equities (stocks and ETFs) that have at least that much trading (DVO stands for Dollar Volume of Options traded, and it is the average of the past five trading days). I prefer to use .csv format, so it shows up nicely in columns, but it is not an extension they allow to upload here. But you can rename it to a .csv file if you like once you have it.

The report also shows the current volatility of the stock (sv) and implied volatility (average of all options in that asset) plus the current percentile (how that compares to all readings over the past 6 years).

Other things naturally affect execution and Bid/Asked spread, as mentioned in the previous post, such as in- or out- of the money you are, the month traded, and even things like if the market maker can easily short the stock. But his gives you a rough guide on where the options volume is (I prefer DVO over contract volume because it really tells you they are putting their money where their mouth is).
 

Attachments

fielman,

Most brokerage firms have pretty good info at their educational area, cboe.com has volume, 888options has a little.

kny 3 :cool:
 
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