Why are some strikes way more liquid?

S

Spaghetti Code

Trading SPY, I've noticed that some strikes tend to have tons more liquidity than others. I'm curious why traders focus on a few, round numbers? For example, the open interest in September SPY Calls:

$445: 48.2K
$446: 16.1K
$447: 19.9K
$448: 12.9K
$449: 11.4K
$450: 145.5K
$451: 38.2K
$452: 12.9K
$453: 11.7K
$454: 84.2K
$455: 29.5K

Aside from 454, there seems to be a lightning rod attached to strikes at multiples of 5, 10, and 50, 100, etc. I can't understand how this process gets started. For example, it makes sense why people trade the more liquid strikes, which pulls in more future trades, but how did that start in the first place?
 
People love whole numbers, it must be a psychological thing. Round numbers are always more popular and memorable with people. When professional athletes reach new milestones/round numbers in their stats, everyone gets excited. The trading world, wall street, is also obsessed with whole numbers, psychological, breakthrough barriers in charts. Funds buy options by the whole, round, numbers...that's why the volume with whole numbers is so much, obviously, more.
 
Spaghetti Code said:
Trading SPY, I've noticed that some strikes tend to have tons more liquidity than others. I'm curious why traders focus on a few, round numbers? For example, the open interest in September SPY Calls:

$445: 48.2K
$446: 16.1K
$447: 19.9K
$448: 12.9K
$449: 11.4K
$450: 145.5K
$451: 38.2K
$452: 12.9K
$453: 11.7K
$454: 84.2K
$455: 29.5K

Aside from 454, there seems to be a lightning rod attached to strikes at multiples of 5, 10, and 50, 100, etc. I can't understand how this process gets started. For example, it makes sense why people trade the more liquid strikes, which pulls in more future trades, but how did that start in the first place?
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Has to do with how easy the MM can get hedged for that strike to remain delta-neutral according to what I read somewhere.
 
IMHO using OI as a measure of liquidity is too narrow. MMs don't care what they trade to hedge - they are simply playing the paper. Much of the trading in SPX/SPY has migrated off-exchange.
Retail tends to favor the exchanges because of transparency and payment - that's also the reason institutional may not want to interact with payment and trade off-exchange.
 
ajacobson said:
IMHO using OI as a measure of liquidity is too narrow. MMs don't care what they trade to hedge - they are simply playing the paper. Much of the trading in SPX/SPY has migrated off-exchange.
Retail tends to favor the exchanges because of transparency and payment - that's also the reason institutional may not want to interact with payment and trade off-exchange.
More...

Retail also has no choice but to "favour" exchanges because we have no access to off-exchange. Does Goldman Sachs want to call little ol' me on my phone to sell me 5 contracts of SPX options? If not, exchanges is all what Retail has.
 
Spaghetti Code said:
Trading SPY, I've noticed that some strikes tend to have tons more liquidity than others. I'm curious why traders focus on a few, round numbers? For example, the open interest in September SPY Calls:

$445: 48.2K
$446: 16.1K
$447: 19.9K
$448: 12.9K
$449: 11.4K
$450: 145.5K
$451: 38.2K
$452: 12.9K
$453: 11.7K
$454: 84.2K
$455: 29.5K

Aside from 454, there seems to be a lightning rod attached to strikes at multiples of 5, 10, and 50, 100, etc. I can't understand how this process gets started. For example, it makes sense why people trade the more liquid strikes, which pulls in more future trades, but how did that start in the first place?
More...
You're confusing liquidity with volume/open interest. To me, liquidity is the ability to trade size with a very tight market. The size and width of the market quoted is going to be very similar with the 449 calls and the 450 calls.
 
FSU said:
You're confusing liquidity with volume/open interest. To me, liquidity is the ability to trade size with a very tight market. The size and width of the market quoted is going to be very similar with the 449 calls and the 450 calls.
More...

That's fair, liquidity is not exactly the right term. But that said, OI/Volume shows where everyone is trading, and more trades happen at the round strikes. My (admittedly non-data based) experience for longer term options is that round strikes do have tighter spreads.

ajacobson said:
IMHO using OI as a measure of liquidity is too narrow. MMs don't care what they trade to hedge - they are simply playing the paper. Much of the trading in SPX/SPY has migrated off-exchange.
Retail tends to favor the exchanges because of transparency and payment - that's also the reason institutional may not want to interact with payment and trade off-exchange.
More...


Aside from Bid-Ask spread quoted by public exchanges, what other ways are there to measure liquidity? Are off exchange trades still cleared by OCC and published?
 
Spaghetti Code said:
That's fair, liquidity is not exactly the right term. But that said, OI/Volume shows where everyone is trading, and more trades happen at the round strikes. My (admittedly non-data based) experience for longer term options is that round strikes do have tighter spreads.




Aside from Bid-Ask spread quoted by public exchanges, what other ways are there to measure liquidity? Are off exchange trades still cleared by OCC and published?
More...

All option trades that are guaranteed by the OCC must be executed on one of the 16 different option exchanges.
 
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