Hi All. Do all stock options pretty much have crap liquidity? I was looking an the options chains for Amazon and Apple today....these are obviously super liquid stocks....and the vast majority of strikes, the trading volume was so thin as to be negligible. I think the highest I saw was just over 500, most being 0 or less than 20. Am I missing something here? Why is the volume so low?
When you consider how many option strikes are out there with no customer orders on the book, and only MM quotes, you can't expect MM to make tight, deep markets on most of the options. If they do, they get picked off when news comes out, without any possible benefit. They focus their competitive markets on the most liquid, highest volume stocks and options, that are near term. There are some MM that focus on the second tier options and longer dated options. They do less volume but have more vig on each trade. Keep in mind that a lot of the volume you see print, was done though a broker with their customer and BD relationships. Those trades are crossed. As an institutional client, you can have those relationships too. They will find liquidity for you for a fee. Unfortunately, if you are a retail client, you have to assume when the markets are wide and have little size posted, that once you are in the trade, it will cost you money to exit too. Bob
That makes sense. How should a retail trader decide if there is enough liquidity in an option to trade? What is considered decent volume and a tight spread in options?
I would be more concerned with the current spreads in the options, then the size. What is the difference if they are 10 up or 500 up if 10 will do it.
If getting done at mid is 50% and lifting offer/hitting bid is 100%, on average how much of the spread would you guess a retail guy pays on small size? Is that percentage better, worse, or the same for wide spread illiquid stuff vs. tight liquid options?