How Does Liquidity Affects Options Return

ironchef · Apr 26, 2016

Sig said:
You can also look at the mid of the surrounding options and use their IV to back into the correct mid for your option if a stubborn limit order on one or both sides is blocking the true mid of your specific option. If you're doing spreads you can also look at the opposite option for the same spread and subtract from the spread amount, e.x. if you have a 100/105 put spread look at the 100/105 call spread, flip the sign, and subtract it from 5 to get the implied put mid. At least on spreads I often can tell that a limit order is interfering with the true mid just by watching the tape on liquid options. The bid/ask are usually always jittering back and forth a few cents/nickles so if one side is steady it usually indicates a limit and you have to assume the true edge is somewhere further out, i.e. the true mid is closer to the steady side than the current arithmetic middle.
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Thank you for your input. I appreciate it.

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How Does Liquidity Affects Options Return

ironchef