Hi guys, I am new to stock option trading and I am confused with the trading volume, which seems too LOW to me. For example, many mid-cap stock options, for the most recent month, only have 100 or even lower volume everyday. My broker is OptionsHouse and they said 100 is 100. It isn't 100 hundred or 100 thousand. So I do my calculation: if an option is marked at $1.5, times 100x multiplier, that is $150 per contract. If today's volume is 100, then $150 x 100 = $15,000 Does this mean there is $15,000 money trading this contract? Doesn't that sound too low? Same logic to "open interests", too. Need some help to understand this. Thanks a lot.
You can Query real volume here: http://theocc.com/webapps/volume-query Some stock have very low option volume and wide spreads. Stay away from those.
I lost a LOT of money trading illiquid (very low volume/open interest) stock options. 100 volume means 100 contracts. Options and Futures are versatile leveraged instruments, however unlike stocks you can't trade anything and everything. You have to find highly liquid ones or you'll get stuck.
Index options that are near the money have very high volumes. Most stock options that are OTM or ITM are indeed thinly traded. Most folks would agree with Mr. 1245 and Mr. TradeCat and tell you to stay away from thinly traded options because of wide bid ask spread and it is sometimes difficult to get out of the trade, especially if you are short, without giving up a lot. On the other hand, I as a small retail trader, found it very difficult to make a buck trading popular options like SP 500 because the market is very efficient and your counter parties are usually institutional investors who are professional traders. Individual stock options, thinly traded or not, may indeed be better if you are good at directional bets.
Thank you so much! I trade stocks for a while but I am new to options. Even for stocks, I stay away from extremely low volume ones. However, I do have a follow-up discussion about option volume: It seems to me that I need to change my definition of VOLUME when I move from stock to option. For example, a stock has 1 million shares outstanding. Today its volume is 200k. Tomorrow is 300k. But no matter what, the outstanding is always 1 million. One day, if I see an abnormal volume, say only 10k, I will be careful. Option seems like another story. When we open positions, we increase the outstanding. When we close our positions, we decrease the outstanding. This makes me confused when I try to use the technical analysis of stock price and stock volume to options. Right? How do you analyze option volume and open interest?
Not in the same way. Volume shows that there is order flow. Change in OI can show you if they are closing or opening, but sometimes that is tricky. I would suggest you ignore option volume, unless you are following or fading volume. If you are a stock trader, use your same skills and either use spreads as directional or long options as a stock replacement. When you look at option trades and order flow, you can't know what they were doing. A long option position might be a hedge vs short stock. Might be rolling a position. You have no idea. One more thing. Since you will be trading small size, volume should not be your concern. You want to stick to option market that have narrow spreads. Stay away from wide spreads except for options like SPX, where you can often trade just below or above the midpoint.
Thank you so much! I am having similar doubts and your answer settle all my doubts! As of option liquidity, bid-ask spread is a better measure than volume or open interests. Then, my (last) question is: AS LONG AS I am willing to pay the spread, no matter how wide it is and how thinly traded the option is, my trades will be settled, right?
Correct. You do you trade on a listed option exchange through your broker. It is their responsibility to clear the trade and deal with any issues. Once the trade clears, the OCC is your counterparty risk. Don't worry about that stuff. Paying the offer and hitting bids on wide spreads is a problem for you. You will be paying a large percentage of your cost in that id/ask spread and it will require your to be too right to make money consistently.
Understand! Thank you again for a very good discussion on option volume, open interest and liquidity.
If you trade illiquid stock options, it is very important to be able to calculate what price between bid/ask you are willing to pay. To do so you do need to be able to calculate the IV you are willing to pay compare to the expected (actual) IV at expiration otherwise you will pay too much when you buy and get too little when you sell. Of course often it is difficult to get the price you want but if you don't get your price you don't have to buy/sell. In thinly traded options, my counter parties are likely the MMs who don't make directional bets and it is my judgement against none. As a small retail trader, in index/high volume I am trading against someone who is an expert so if he is willing to trade I must be on the wrong side. Maybe that was why I never made any significant money trading indices.