{"id":1979091,"date":"2014-04-17T12:59:50","date_gmt":"2014-04-17T07:29:50","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=1979091"},"modified":"2014-09-09T12:28:20","modified_gmt":"2014-09-09T06:58:20","slug":"options-liquidity","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2014\/04\/17\/options-liquidity\/","title":{"rendered":"Options Liquidity"},"content":{"rendered":"

Liquidity (or the lack thereof)<\/h3>\n

Open interest is a measure of liquidity of a particular market. For each buyer of a contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered ‘open’. OI refers to the total number of derivative contracts that have not been settled. <\/p>\n

Other than a few select indices and stocks, there is absolutely no liquidity in the option market. Here’s a chart of the latest total OI for the nearest (April) expiry:<\/p>\n

\"OI<\/p>\n

And its worse for the next series:<\/p>\n

\"OI<\/p>\n

Bid-offer spread<\/h3>\n

The problem with trading illiquid options is that the bid-offer spread ends up killing your trade. Compare and contrast the spreads for UNITECH and DABUR:<\/p>\n

\"UNITECH<\/p>\n

\"UNITECH<\/p>\n

\"DABUR<\/p>\n

\"DABUR<\/p>\n

Don’t stop at trade setups<\/h3>\n

When you conceive option trades, make sure you consider liquidity constraints. Otherwise, your trade is likely to remain on paper. <\/p>\n

The liquidity footprint is not static. For example, RCOM, which was #8 in Jan is nowhere to be found in the liquid dozen in April:<\/p>\n

\"OI<\/p>\n

Monitoring liquidity risk is as important as checking your deltas and P&L and can often make or break a trade.<\/p>\n","protected":false},"excerpt":{"rendered":"

Liquidity (or the lack thereof) Open interest is a measure of liquidity of a particular market. For each buyer of a contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered ‘open’. OI refers to the total number of derivative … <\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471,9],"tags":[1200],"class_list":["post-1979091","post","type-post","status-publish","format-standard","hentry","category-investing-insight","category-your-money","tag-options","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/1979091","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=1979091"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/1979091\/revisions"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=1979091"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=1979091"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=1979091"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}