Premium sellers who want to take advantage of volatility in the markets need to learn the lessons in this segment about the bid/ask spread which explains what makes it widen and contract and how much it can widen as volatility increases. Anyone trading these markets can benefit from the information here.
One of the best indicators of liquidity in a market is the bid/ask spread. The difference in the spread is the opportunity cost for option traders. As volatility increases so does the spread. This segment shows how recent volatility widened the spread.
Also discussed is some of the nuts and bolts of trading volatile markets. It can often be easier to get a good fill on a single option. When the markets are volatile though sometimes getting filled on a spread is easier and Tom and Tony explain why. Volatility increases opportunity but it doesn't come without a cost.
Takeaways:
When markets begin to experience larger intraday moves, the bid/ask spread for stocks and options will widen, even on the most liquid products
Price discovery plays a bigger role in these types of markets in an attempt to minimize slippage costs
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista to learn how any why the bid/ask spread moves, how slippage can affect your profits and how to best deal with the increased volatility in the markets.
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