You’ve often heard us talk about the importance of trading liquid options until you are blue in the face. In this session of The Option Alpha Podcast we’ll put a real dollar figure to this concept and show just how much “slippage” is costing you trading options that are illiquid.
Specifically markets that show a bid/ask spread of just $0.20 could end up costing you more than $3,840 each year - and that’s just the cost of getting into or out of the trade!
Throw in the risk that the stock doesn't move the way you want it and you can easily see why most traders dig themselves into a hole even before the trade has a chance to work for them.
Yet, often times we focus too much on our commission costs and rarely if ever do you “feel” the pain that slippage costs your portfolio. It’s time we start worrying less about commissions and more about slippage by focusing on only highly liquid options and underlying stocks.
In Today's Show, You'll Learn About:
- Understanding the BID/ASK spread and why it can never be "zero".
- A great real estate example to help prove the slippage concept.
- Why slippage is an important factor for high-frequency options trading.
- Great examples of liquid stocks with options in AAPL & SPY (plus some examples of stocks with horrible bid/ask spreads).
- How we can quantify and put a dollar amount on the "Cost of Illiquidity" when trading options over the course of a year.
- Why slippage could easily be costing you $3,840 per year on the low end.
- Our guidelines for finding highly liquid and tradable options.