Most Liquid Options

The Importance of Liquidity When Trading

The most important thing a trader needs to have is a positive expected value on the trades they take.

Without it, we are simply at a roulette table betting on red.

Despite this even if we have a positive expected value without liquidity there is no way to take advantage of it.

After all the less liquidity the more of our edge is eaten up in transaction costs.

Liquidity is always there when you want it but never when you need it. 

Sometimes stocks may appear liquid and have tight bid to ask spreads.

Yet during times of market crises that liquidity starts to evaporate.

Markets become fast-moving and the bid-ask spread widens substantially.

More common than not, that is precisely the same time we need the liquidity the most. As others are forced to get out of a position.

By focusing on the most liquid options, we reduce this risk of having our liquidity taken away when we need it the most.

These semi-liquid options can be traded, but need to be handled with care.

Liquidity and Market Depth

Another metric important in determining liquidity is market depth. Imagine that the bid-ask has only one contract on either side but I need to sell 100 contracts.

For most retail traders with smaller investments (myself included), market depth is not a big issue.

But if you start managing millions it becomes a lot more important.

If you listen to a podcast from any fund manager, who has billions of assets under management, they will often spend half the time talking about liquidity.

This is because of the size of their orders and positions.

For them the importance of having market depth and liquidity cannot be overstated.

Tips on Finding the Most Liquid Options

So how does one go about finding the most liquid options? Here are 5 tips that I use.

Focus on tickers that have a high average options volume.

This means, rain or shine, there are a lot of options being traded on the ticker.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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