Liquidity in Options

I hear it all the time…

“Options aren’t liquid enough to day trade; the spreads on options are horrible.”

To broadly say options are not liquid couldn't be further from the truth. However, it’s certainly true that liquidity plays an important role in all financial instruments. Simply put, liquidity considers the amount of volume traded on a particular instrument. Stocks are generally the most liquid assets available to investors. The spread refers to the difference between the price buyers are willing to buy and sellers are willing to sell. An instrument with very little liquidity will often see wide spreads making it difficult to buy and sell at the price point you want.

While there are certainly options that have very little liquidity, the Beta names we trade on a regular basis are incredibly liquid and easy to get in and out of trades without serious concerns for slippage. In general, high priced options on the Beta names like Amazon (AMZN) or Tesla (TSLA) will have wider spreads than stocks like Apple (AAPL), but in most cases the spread isn’t any worse than the stock itself. For day trading options, we always want to look for the most liquid instruments available. A list of our favorite stocks to day trade options on include:

• AAPL

• AMD

• BA

• BABA

• FB

• MSFT

• NFLX

• NVDA

• ROKU

• TSLA

• SPY

• QQQ

When trading any of the stocks above, we also need to consider which strikes are the most liquid on the day. The best practice for finding the most liquid strikes is to look at the volume and open interest. Once the market opens, monitor the volume on various strikes to determine where the majority of traders are positioning themselves. Open interest can also be a clue as it tells you how many contracts are currently open at a particular strike and expiration. With this information, we can choose better strikes for our trades. This ultimately lowers our risk by minimizing the chance of severe premium decay and slippage when we’re looking to get in and out of positions.

There are certainly more stocks that offer options, however we recommend avoiding very cheap (small cap) stocks that happen to have options. These will generally be options with very little liquidity and not something we have any experience with.

So, the next time someone says that options have no liquidity for day trading, you will know this false narrative is highly misunderstood.