Lesson Overview

Strong Liquidity Examples

In this short presentation we'll show you some examples of stocks that have great liquidity as well as stocks that have very poor liquidity and some concrete examples as to why poor liquidity will cost you money on the bid ask spread.

Remember that if you trade non-liquid options (however great the setup might be for a new trade) you run the risk of never being able to close or adjust the position because the market is too small. So it's always in your best interest to only trade stocks that have very liquid and tradable options.

More Discussion

Was This Helpful? Add Comments/Questions

  • Riley

    So with stocks that have high open interest but not much volume like the second example. How long do you usually have to wait to get filled? I find a lot of stocks that have high open interest but there is little to no volume. Are these still counted as liquid when we are wanting to make adjustments to trades in the future won’t it make it hard to get out of the market?

    • I would still wait a couple hours to get filled. If there is a lot of open interest then the markets are deep but maybe not that active on the particular day.

  • Yep you’ll still have slippage issues on those large indexes.

Show Video Transcript +

In today's take five segments I want to talk a little bit about what great liquidity looks like and two things that you should check for when you're looking for great liquidity on a stock that you might want to trade options on.

Liquidity is not only important in the actual underlying options but it's actually important in the actual stock itself too. I think that most traders actually miss that. We're going to go over two different examples to keep this kind of whole two theme: a stock that has great liquidity and a stock that has okay liquidity.

It's not a stock that has horrible liquidity, because those are easy to find but something that maybe has, kind of okay liquidity to start the day and kind of borderline and we can talk about those.

The first one that we're going to talk about is Twitter and Twitter's a pretty good chunk today by almost 2% today as the market opens up and it's only about 10:30 in the morning so about an hour after the market opened.

You can see the first thing that we want to check is we want to see, again, great volume and actually the underlying stock. This is important because this really tells us that the market is extremely liquid for the stock which then helps us understand a little bit better about the numbers that we haven't...

And just being more confident in the numbers that we get as far as probability numbers and standard deviations. Things like that.

By having an underlying stock that trades anywhere from at least you know couple hundred thousand shares a day, you can see that Twitter has already eclipsed almost 4.2 million shares just in the first hour, so extremely liquid.

I would say that, you know, kind of a baseline that you maybe want to stay with is somewhere around 500,000, 600,000 shares a day on average is really really good and very good liquidity. Again, Twitter's a big name so it's going to trade a lot more and obviously it's going to be even more liquid.

The other thing that you want to look for as you want to look for actually liquidity in both the volume and open interest of the actual underlying options.

With Twitter, again, you can see both on the call side and on the put side they've got a ton of volume and open interest at the money strikes, deep in the money strikes on both sides, have lots of volume and open interest.

It bodes well for Twitter, and as an options trader, this is what I like to see. There are some fills going in this morning. I like to see a lot of open interest because that means that the markets are deep. There's a market there. It may not be active today.

In the volume category and kind of the volume column, then you can see what activity we've had today, and you can see a couple hundred shares, a couple hundred contracts traded and each individual strike price.

Again, just bodes well for the liquidity of Twitter that not only does it have deep markets where there's a lot of people who have participated. Kind of that open interest factor. You also have really really active markets today where a lot of volume's being traded today.

That kind of help and again, everything is then represented in better pricing, better fills, a lot faster execution. One stock that maybe has okay liquidity is GMCR. This is Green Mountain Coffee Roasters and Keurig.

You can see that today, unlike Twitter, it has good liquidity, very good liquidity. It's had just over 500,000 shares traded in the actual stock today. Very good for early in the day, about an hour into trading. You can see that the options are very liquid as well, just not as liquid as Twitter.

I wanted to give you this comparison because this is definitely a stock that we've traded before, we'll continue to trade in the future. We like GMCR as far as the options. You can see that there's definitely a difference between great liquidity and good liquidity.

This is by no means a stock that has bad liquidity. It's definitely got open interests, its definitely got volume but you can see how much lower the volume is on GMCR today, 50, 10, 9, 12, contracts here and there.

Not a lot of activity like Twitter and again, gives you a good comparison between the two to help you understand what great liquidity looks like.

As always, I hope you guys enjoy these videos. If you like them, please thumb up this video on Youtube or share it on Facebook or Twitter.

Let us know what you think, help spread the word. These videos are designed for you to hopefully learn one new cool thing about options every day when you're going to and from work and really quick video tutorials.

As always, happy trading.

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