How can I measure liquidity of options?

gbessone · May 16, 2007

Hello everyone,

I am new to trade 2 win and new to options also. I have been reading the different posts in the forum and im surprised with the friendliness of everyone here. =)

Since im new to options, i have the following doubt:
Let's say i would like to day trade options, how can i know the liquidity, i.e. how often that option is traded?
This is really important, because i've seen options with high volume and high open interest that have only 3 or 4 trades in one day (perhaps only 1 trade made the high volume possible), while there are others with not so much volume that trade more often.

Does this make sense?

best regards,

Gustavo from Argentina=)

grantx · May 17, 2007

Gustavo,

If I understand you correctly, eg 1 trade with high volume, this may not be unusual. Maybe someone is hedging their portfolio, offsetting risk exposure from a cfd trade, market-maker establishing a delta-neutral position, or secretly building a stake in a company through the back door, so to speak (possible but not very likely).

Generally speaking, the major stocks of an index (FTSE 100, DAX, DOW) will all have high volume; smaller stocks will have lower volume. I would suggest you try and concentrate on the larger stocks, or just the options on the indices themselves, eg FTSE index options, DAX index options.

Sorry I can’t be of more help.

Grant.

ronblack · May 17, 2007

Open interest is more important and a better measure of liquidity than daily changes in volume.

You brought up a good point though I think nobody can fully answer. Liquidity can dry up fast as traders lose interest about a particular option. Spreads widen as market makers try to squeeze out their profit from fewer traders. maybe a historical analysis on spreads is a better indicator of liquidity.

Ron

gbessone said:
Hello everyone,

I am new to trade 2 win and new to options also. I have been reading the different posts in the forum and im surprised with the friendliness of everyone here. =)

Since im new to options, i have the following doubt:
Let's say i would like to day trade options, how can i know the liquidity, i.e. how often that option is traded?
This is really important, because i've seen options with high volume and high open interest that have only 3 or 4 trades in one day (perhaps only 1 trade made the high volume possible), while there are others with not so much volume that trade more often.

Does this make sense?

best regards,

Gustavo from Argentina=)

dewitte · May 17, 2007

Just to add: NTM (near-the-money) options are usually most liquid, so when the underlying moves away it may "leave behind" options that have already built high OpenInt but become less liquid now they move ITM or OTM.

gbessone · May 17, 2007

Thanks to everyone.

I wish there was an indicator called "number of trades", as we have here in the small stock exchange of Buenos Aires. I find it more useful than volume and open interest.

regards,

Gustavo

How can I measure liquidity of options?

gbessone

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grantx

Senior member

ronblack

Active member

dewitte

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gbessone

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