An illiquid option is a contract that cannot be sold for cash quickly at the prevailing market price. Illiquid options have very low or no open interest.
Table of contents
- What Are the Top Stocks For Options Trading and Most Liquid Symbols?
- Options Liquidity: Why It Matters, Where to Find It
- Illiquid Option Definition
- How Do We Measure Liquidity?
It may take several minutes to complete, but you can schedule the scan to run automatically at a quiet time like the overnight.
Finally, the Hot Lists tool includes several pre-built scans highlighting options activity. Here are two useful lists for discovering stocks with the most liquid options:. Sign in. Log into your account.
What Are the Top Stocks For Options Trading and Most Liquid Symbols?
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Watch The Market Today April 1, Mathmatically, that looks like this:. If you use dough, this calculation is done for you. Remember that is it always easier to get filled closer to the natural price rather than the mid price. Let's use a Honda Civic as our representation of a liquid market. Because so many people drive them, it's easy for buyers and sellers to determine a fair market price.
When buying a brand new Honda Civic comparable to buying an option or stock right off the lot, the Civic does not lose too much value because there is so much demand for them.
Options Liquidity: Why It Matters, Where to Find It
A Ferrari would be our example of an illiquid market. While these cars are sexy and fun to drive, there are not a lot of people looking to buy a Ferrari. Stock volume simply refers to the amount of shares traded on any given day you can find this in dough on the Quote menu - indicated in the image to the right. When trading stock, we generally like to trade stocks that have volume of over 1,, shares per day. Stock volume is not always synonymous with option volume!
A stock might be heavily traded, but have a barren option market. It is important to keep this in mind when deciding what underlyings to trade. Option volume is very similar to stock volume in the sense that it is defined as the amount of contracts that have traded hands that day.
Illiquid Option Definition
The main difference between volume when it comes to stocks and options is that a stock is always trading at the current market value and options can trade a multitude of different strike prices. Because there are so many option strike prices to choose from, an option market might have just a few liquid strike prices. One leg could be illiquid! If the strike is not trading little to no volume and you are long or short that strike, you may not be able to get out very quickly for a fair price and if the volume is that low, you may not be able to exit the trade at all!
This is why we created the liquidity indicator and always recommend that traders stick to underlyings with lots of volume. A good rule of thumb for looking at option volume is to look for trades that have strike volumes in the thousands. You can find option volume on dough in a couple of different places You can see option volume on the curve interface by clicking the Quote " tab, then expanding the chart and changing it from a price chart to a volume chart.
One really cool aspect of option liquidity is that we can see the open option contracts in the market referred to as open interest. Since options have a predetermined expiration date, they are not traded instantly like shares of stock are.
How Do We Measure Liquidity?
Open interest is usually a larger number than option volume, and it shows you the amount of contracts that are open, and have yet to be closed an example of this would be an option that you have sitting in your portfolio - it is an open contract, and accounts for open interest because of that. If an option strike has a large amount open interest and a low volume, it could just be a slow day of trading for that particular strike price which means you probably have a decent chance of getting in and out of the trade if need be.
If a strike has high volume and low open interest, it could mean that market participants are closing their positions on that strike, and that it may become increasingly difficult to get filled at a fair market price.
- How Do I Measure Option Liquidity?;
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- Illiquid Option Definition.
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The best place to find open interest on dough is to navigate to the table interface, then switch the graph settings at the bottom from 'Volume' to 'Open Interest' as seen in the GIF to the right. Utilize this information when assessing the liquidity of your next trade to improve your chances of success. On the grid page, we have a few different preset watchlists. This watchlist is auto populated and uses a complex set of criteria to search for underlyings with high option volume it is constantly updating throughout the day as new stocks become liquid and old stocks become illiquid.