Liquidity is a key component that needs to be factored in when opening and closing trades and since liquidity is determined by volume, open interest and a tight bid/ask spread we ran a massive study to learn more about bid/ask spreads. Tight markets are more important as the option price becomes less expensive. OTM options are cheaper because they have no intrinsic value only time premium. Avoiding illiquid markets will minimize your slippage and raise your probability of success.
A study was conducted collecting the Bid-Ask spread of 132,000 contracts in 2016 with open interest greater than 1000. We then separated the option contracts based on Calls vs Puts, in-the-money (ITM), at-the-money (ATM) and out-of-the-money (OTM) options and analyzed the bid-ask spread relative to the average mid-price and compared the results to the SPY (S&P 500 ETF). A strike that was equal to or within 1% of the underlyings price was considered to be ATM while others were either ITM or OTM.
A table of SPY options market spreads was displayed. The SPY had tighter bid-ask spreads at every strike compared to the broader market options.
A table of the top 10 most liquid underlyings ranked by OTM option volume was displayed. A second table used the tightest bid/ask spreads with somewhat different results. The latter table was made up of tastylive favorites and provide the most bang for your buck.
For more on Liquidity you can watch these segments:
The Skinny On Options Math from October 23rd, 2014: "Market Liquidity"
Market Measures from September 24th,2015: "Liquidity Awareness"
Market Measures from November 5th, 2015: "Liquidity Metrics: CMG"
Options Jive from December 21rst, 2015: Comparing Option Cycle Liquidity
From Theory To Practice from February 23rd, 2016: "Liquidity"
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways and a deeper and better understanding of liquidity in the options markets.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.