Lesson Overview

Liquidity & Pricing Requirements

After you select a company that you want to make an earnings trade on it's important to have a set of guidelines to use for both liquidity requirements and possible premium pricing.

Here are 3 different examples of socks that have great liquidity at strike prices we want to trade as well as some tips on how much premium you should collect as a percent of the expected move.

A goal rule of thumb (if you can get it) is to collect at least 20% of the expected move in premium or credit. So if the stock’s expected move is $1.00 in either direction then if you can collect $0.20 selling options you’ll be getting a very rich premium which is great.

More Discussion

Was This Helpful? Add Comments/Questions

  • Gregory Corrado

    Perfect answer to my question about pricing! Thanks!

  • Evo

    LENNAR would be okay for a straddle strategy…yes? You would collect more than %20 of the expected move in premium.

  • Yeah I think it’s better to pass on these low IV trades – the premium just isn’t there.

  • I might just take time to get to the next level and some experience to prove to them you can handle the next step of strategies. This podcast we did on approval levels might help also since we talked to a couple brokers before publishing it: https://optionalpha.com/options-approval-levels-19297.html

    • John Mascaro

      OK thank you Kirk for the links I’ll read and watch those immediately! I’ll also keep moving forward with my goal to get to higher trading levels to manage my own account as I see that as a great next step for me to combine my existing financial background as a CPA (NY/FL) and move into a more rewarding career!

    • John Mascaro

      PS UPDATE: Kirk, I listened to your great podcast on options approval levels thanks! Of the various brokers I have now talked to and applied with – one firm I just spoke with, OptionsHouse, has approved me to trade “all spreads and basic calls & puts” appearing on their pop up screen when executing trades (debit/credit spreads, verticals, diagonals, butterflies & condors (including Iron), calendars etc. Just not naked puts/calls. They have a great platform too with great analysis tools etc. My issue is that, for purposes of analysis & execution, I have become familiar with the dough.com platform and of course TOS. You would agree I presume that I should take advantage of the approval level and go forward with OtionsHouse right? After all, I can continue to study your GREAT material at OPTIONS ALPHA, use the content & tools here, but ultimately place the trade via OptionsHouse, right? That allows me to start trading the more efficient/probable strategies rather than biding my time – would you agree?

      • I would move forward for the time being because you could leverage the trading approval there later on when you apply someplace else.

  • Generally a good rule for strangles but yes iron condors are harder to hit this target since you have to buy protection (though you could buy wide wings)

  • Yep agreed, liquidity is a big consideration because we want to reduce slippage as much as possible. Also the founders of TOS also started a new brokerage, TastyWorks which has $1 commissions for everyone – check it out.

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