Ourplatform has a indicator. It is a very valuable tool. That’s because liquidity is your most important consideration before , especially for options. Your strategy can be brilliant and your timing perfect but if you pay too much to get in and give up too much to get out you will not make money. Every equity or ETF that has options has at least a few different choices. Can they help us to explain the critical importance of liquidity?
An example of a bid-ask spread was displayed. The spread represents what a market participant would pay if he bought the asking price and sold the bidding price. The spread in the example is 0.05 which equates to $5 per option contract. Higher priced stocks will, in general, have larger bid-ask spreads but for simplicity’s sake we simply compared the dollar value. A graph comparing several stocks at-the-money (ATM) options with 30slippage costs was displayed. The graph showed that the highly liquid names have a very small bid-ask differential. Tom and Tony noted that if you want to be successful in trading you want to give up the least amount of bid-ask edge to the counterparty.
A graph comparing the open interest in the SPY (S&P 500 ETF) standard expiration cycles (Monthly) to the SPY non-standard expirations was displayed. The graph showed that most of the trading activity takes place in the two nearest standard expirations and all the expirations further out in time are less active. The non-standard expiration cycles are also less active. A final graph comparing the SPY ATM slippage per expiration was displayed. The graph showed that the slippage was the greatest in the SPY longer term expirations as well in the non-standard expirations.
For more information on Liquidity see:
Market Measures from September 24th, 2015:
Options Jive from December 21st, 2015:
Market Measures from April 5th, 2016:
tasty BITES from May 4th, 2016:
Watch this segment of Options Jive withand for the important takeaways and a better understanding of liquidity and your slippage costs amongst the different expiration cycles.