For those of you that trade options on securities, where your quantity of contracts is a high percentage of the open interest and/or volume, can you provide some insight on how you size the position (and manage the trade, multiple staggered entries...?, spread the trade across multiple strikes, spread the trade across multiple expirations?) relative to it's liquidity so your trade does not adversely impact your pricing? I typically try to keep my size less than 1/20th of the Open Interest size, but would like to better understand how others handle this, as I would like to increase my sizing if practical. Note: assume the position will be closed in a few days, and will have similar concerns on exiting. Say: Desire is to buy N PUTs, and sell them X days later. What "practical" methods are recommended when N approximates or exceeds Open Interest and volume. Thanks for any "nuggets" of information on how to practically maximize size without stepping into a buzz saw!
Sizing is based upon risk tolerance for me. Unless you run a massive account buying 1000s of options or are dealing in really illiquid instruments.
if your buying on margin.. beware.. if the bid/ask spread widens they will price your book based on the the wide spread and you might think your liquid but your not... and spreads widen when volatility goes up.. its all about the squeeeeeeeeeeeze
This discussion is specific to lower liquidity options only (NO SPY, AAPL, etc) Can someone point me to information that helps shed more understanding on the relatively large Bid Size and Ask Size, when the Open Interest and Volume are relatively low? See screen shot below for an example. OI=31, Volume=19, yet bid size and ask size are hundreds. I suspect a healthy percentage of those Bid/Ask sizes are automated bids and asks, as they will "move" as a small player places a higher bid or a lower ask. Any enlightenment, or outside article references will be greatly appreciated:
Those are indeed market makers quoting prices that allow them to immediately hedge off the position and lock in a profit. They rarely get filled, except when a retailer hits their quote. You'll see these large quotes moving around very fast - it's all computers with algorithms that will offset the trade in a split second if they get a fill.