Is there anyway to determine the maximum number of option contracts I can expect to be able to buy based on the strikes current open interest and volume? In other words, say I wanted to put in an order for 500 contracts for a strike with 5k volume and 25k open interest, would you be able to expect a reasonable execution in this situation? When do things become a bit questionable...ie you're contract size is too large for the market and how can you tell (if at all).
A "sloppy and non-thought out" rule of thumb I use is: your qty can be up to OI/20. Others here likely have more concrete info.
How has that worked out for you in the past and have you attempted to put in larger order sizes than the ratio your provided?
Liquidity is based on the number of market makers that follow that options, the amount of customer orders on the books and how easy it is to hedge. OI is not a factor.
Victory5: For strategies requiring real-time management, I require heavy volume of greater than 20X my size. For more thinly traded contracts when I have a longer term interest, I sometimes enter with my size up to OI/20, if I expect the liquidity to improve while in trade. I only use the OI/20 size limit rule for long term trend trades on selective ETF's. This is probably not a "reliable" filter, but should likely be added with other considerations. I ceased trading TUR last year, after the Bid Asked spread on a $6 contract jumped to $4, so took TUR off my radar. (It had ample OI at the time)
Even for SPY near OTM, that is very large size. You have to work it with icebergs intermittently throughout the whole day, if not two days. If you intend to do this much size in other names with same day immediacy, you probably have to up your game with market impact models, an array execution algorithm choices and privileged access to institutional pools.
So for retail investors and traders, 500 contracts for nearly any underlying is going to be nearly impossible to execute quickly and at a fair price?
Screen markets don't always tell the picture, even though at that moment, it is all you can depend on. Through the use of an institutional broker to "shop" your order, liquid products can be very liquid. It's not unusual to get 100,000 up markets in OTM options in SPY or QQQ. AAPL can also be very liquid. Without the use of a broker, you have to find liquidity by entering your order and working it.
Ok that makes a bit more sense. I guess what I was ultimately trying to ask is what is the (roughly) maximum amount of money you can put into a single option play. Specifically I was looking at the SPY and VXX markets both of which seem to be fairly liquid although the first more so... Ultimately it seems like the theoretical 'cap' for the number of contracts you can reasonably buy is north of 100k in the markets listed above? Is that correct? I have never had to deal with anything that large but i'm trying to figure out where the limit may be.