This is a topic that frustrates the heck out of me. How can you tell if an option is liquid enough to trade? Consider this: most volume occurs "at-the-money". If you correctly pick an option that moves "in-to-the-money", now volume is lower because it's not "at-the-money" anymore, so you wind up losing a chunk of profits because the bid-ask spread is wider. Also, it seems that volume fluctates a lot so even if you find something with "good" volume today, that doesn't mean it will have enough volume when you decide to exit the trade. I see many people on optionetics say that you need a stock with "300000" in volume as a rule of thumb, but that's not too helpful. I see plenty of stocks with 1000000+ volume and practically no option volume. It seems to me that if you decide to trade options, the stock has to move an unreasonable amount if you have any hope to cover the option premium, the commissions AND the wide bid/ask spread. It's unlikely that ANYONE can do this on a consistant basis. How does a trader deal with this problem? How can you possibly know what to trade?
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Volume? Bid - Ask? Liquid or not?
- Thread starter ScottDamashek
- Start date
I think by "trade" you mean buying and selling options. Why not just sell options, and trade stock around the position? You just saved yourself the commission and spread on the option exit (assuming you hold the OTM short option into expiration).
Quote from ScottDamashek:
This is a topic that frustrates the heck out of me. How can you tell if an option is liquid enough to trade? Consider this: most volume occurs "at-the-money". If you correctly pick an option that moves "in-to-the-money", now volume is lower because it's not "at-the-money" anymore, so you wind up losing a chunk of profits because the bid-ask spread is wider. Also, it seems that volume fluctates a lot so even if you find something with "good" volume today, that doesn't mean it will have enough volume when you decide to exit the trade. I see many people on optionetics say that you need a stock with "300000" in volume as a rule of thumb, but that's not too helpful. I see plenty of stocks with 1000000+ volume and practically no option volume. It seems to me that if you decide to trade options, the stock has to move an unreasonable amount if you have any hope to cover the option premium, the commissions AND the wide bid/ask spread. It's unlikely that ANYONE can do this on a consistant basis. How does a trader deal with this problem? How can you possibly know what to trade?
If you play directional moves, you have to be precise in entry point with sound risk management. You really don't need a lot of liquility to play options. Of course, you can play netual strategies too.