Trading in liquid markets is a key component that needs to be factored in when opening and closing trades, especially for a tasty BITE sized account. What makes liquidity and what are some resources you can use for liquidity information?
An underlying should have options with high open interest across several strikes, not just the at-the-money (ATM) strikes or one you are interested in trading. The bid/ask spread needs to be narrow. There have to be multiple expirations, including monthly and weekly expirations. Examples were shown of tight bid/ask spreads in the ATM strike in SPY (S&P 500 ETF) and BAC. The bid/ask in PCLN was wide and lifting the offer and hitting the bid would result in a loss of $360. Avoiding illiquid markets will minimize your slippage and raise your probability of success. Be aware that bid/ask spreads will widen in periods of market volatility.
A table of the top ten underlyings for regular equities and ETFs was displayed. It was based on volume and bid/ask. A table of the dough /tastylive liquidity indicator was displayed. The table showed the ratings from 1-4 stars and why. An example from the May 2, 2016 tastylive Data Science and Research Report was displayed. The report included the symbol, implied volatility rank (IVR), IV, last price and liquidity indicator. All of these are valuable tools you can use.
For more on the importance of liquidity see:
Market Measures from September 24th, 2015: “Liquidity Awareness”
Market Measures from November 5th, 2015: “Liquidity Metrics: CMG”
Options Jive from December 21st, 2015: “Comparing Option Cycle Liquidity”
Market Measures from April 5th, 2016: “Bid-Ask Spreads | The Importance of Liquidity”
Watch this segment of tasty BITES” with Tom Sosnoff and Tony Battista for the important takeaways and a better understanding of what really makes a market liquid, plus some tools you can use for determining liquidity.
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