why is that when there is wide spreads its a sign of a not liquid series and why if there tight its a sign of liquidity ?what is condider tight on spx ? or djx?
Let's say that in market XYZ the bid-ask spread is 150-100. If I place a limit order at 100 maybe I will not be filled so fast, because there are already some orders queued up. Therefore I place it at 101 to be in front of other people. Another guy sees my order at 101 and places his order at 102 to be filled before me. Compound this behavior for all market participants. More participants = more liquidity = tighter spread. This is of course a very simplistic explanation but that's the basic principle.
An amateur retail's this is how I look at the situation: When there are a lot of buyers and sellers, the opportunities to arbitrage the buy/sell process is greatly diminished because of the large number of buyers/sellers. So in a liquid market (lots of buyers/sellers chasing it) bid/ask tends to be very tight. If there are few buyers/sellers, it is hard for the market makers to established a price, so to covered their risks, since they are required to offer bid/ask they widen the spread. SPY, Apr 5th $282 strike the bid/ask spread was $0.01 with volume of 9600 contracts. CELG, Apr 5th strike $94.5, spread is $0.31 on a bid/ask of $0.7/$1.01 with volume of 28 contracts. Don't know if this make sense.