Relationship of Bid, Ask Spread decreases OTM

Discussion in 'Options' started by seldin, Jul 24, 2007.

  1. seldin


    I usually trade Futures and Futures Options.

    Can you please comment on the following.

    It seems that if you buy/sell At The Money options that at that point the Bid and Ask spread are probably much tighter than when the same options go Out of the money. Same with volume. The further OTM the less volume traded for these options.

    Here is where I am going. I am looking at trading Stock options I don't see the same volume compared to the Futures/Futures Options I am trading.

    1) So I am thinking that if the spread is wide OTM and I decide to trade these, that the volume will increase and spread will decrease as OTM options go closes to ITM.

    I am looking at the YM (mini Dow 30), open interest looks high, but...

    I look at DVO (Dollar Volume Of Options) and YM is at 2,144,000 on my software. Yet Option Volume looks much less than stocks that have 200,000. Is it really because YM is much higher based asset based on price. So it that's true, do I need a much higher DVO for Futures contracts, since they are magnitudes greater than a typical stock price.

    2) I noticed that options YM OTM have much less volume than I would have thought. Am I correct on this?

    3) What do think is a good Open Interest to determine high enough liquidity on Stocks?

    Thanks much,