Options liquidity matters. It impacts how easily you can trade options without extra costs or frustrating delays. But how do you spot liquid options worth trading? This article breaks down key liquidity metrics—like volume and bid-ask spreads—and offers practical tips, including a real-market example, to help you find the best opportunities.
Key takeaways
- Options liquidity is the ease with which options can be bought or sold without significantly affecting their price.
- Liquid options are essential for minimizing trading costs and ensuring efficient execution.
- Traders should evaluate liquidity metrics like volume, open interest, and bid-ask spreads to identify the best opportunities.
What Is Options Liquidity?
The first concept we should clarify is that options liquidity describes how easily an options contract can be bought or sold without significantly affecting its price. Liquidity is a key feature of any financial market, and in the options market, it plays a huge role in ensuring smooth, efficient transactions.
Why does options liquidity matter so much? For traders, high liquidity means reduced slippage—the difference between the expected price of a trade and the actual execution price. When you trade liquid options, you’re more likely to get fair pricing with tighter bid-ask spreads. On the flip side, low liquidity often results in higher costs and delays when executing positions, which can eat into your profits.
Liquidity is also tied directly to market efficiency. Liquid options allow prices to adjust quickly based on new market information. This means traders benefit from more accurate prices, reflecting the true value of the underlying assets. Efficient markets depend on liquidity to stay active and competitive.
Another important point is that liquidity tends to feed on itself. When options have high liquidity, they attract more traders. More traders create even more liquidity, forming a virtuous cycle that enhances the market’s function. It’s a self-reinforcing system where both buyers and sellers benefit from smoother transactions and better trading options.
Here are some things you should remember on why liquidity matters:
- Reduced costs – Liquid options minimize slippage and provide tighter bid-ask spreads.
- Faster execution – High liquidity ensures trades happen quickly and with fewer delays.
- Market efficiency – Liquid options reflect accurate pricing, helping traders make informed decisions.
- More opportunities – Popular, liquid contracts tend to offer a wider range of strategies.
Therefore, understanding options liquidity is helpful to make smarter trades with less risk and better returns. Always check key indicators like volume, open interest, and bid-ask spreads to ensure you’re trading in markets that offer the liquidity you need to succeed.
Different Ways to Measure Options Liquidity
Measuring options liquidity involves looking at specific metrics that give traders a deeper understanding of market conditions. Below, we’ll cover the key measures used to assess how liquid options are and why each one matters.
Total Option Volume
Total option volume refers to the number of options contracts traded within a given time frame. On our options screener, this is shown as the total volume of options traded across all strikes and expiration dates, averaged over two weeks. By default, a value above 5,000 is used, but you can fine-tune it based on your preferences. Here is how this indicator will look on any screen you choose (focus on the red-highlighted area):
Why is this important? High trading volume is a strong indicator of options liquidity. When a lot of contracts are changing hands, it suggests an active market where you’re likely to find buyers and sellers with minimal delays. For traders, this means quicker execution and tighter pricing.
Open Interest and Total Open Interest
Open interest represents the total number of open contracts on a specific option. Total open interest, on the other hand, tallies the number of outstanding contracts across all strikes and expiration dates. On our screener, these metrics are referred to simply as “open interest” and “total open interest” filters, as you can see below:
These numbers are crucial for evaluating market activity. A higher open interest indicates that more traders are engaged with the option, which usually translates into better liquidity. Total open interest goes further by allowing you to assess the overall activity for a given asset. Both measures are excellent for pinpointing liquid options.
Bid-Ask Spread
The bid-ask spread measures the gap between the price a buyer is willing to pay (the bid) and the price a seller wants to accept (the ask). On our screener, this is displayed both as a dollar amount and a percentage. Here’s an example of the bid-ask spread value on any screen you choose:
Tighter bid-ask spreads are a signal of liquid options. Narrow spreads suggest lower transaction costs, making it easier for you to enter and exit positions without losing value. For traders, this simple metric offers a quick way to assess whether a market is worth engaging with.
Option Volume Power
Option volume power is a unique metric that combines today’s trading volume with open interest. Specifically, it’s calculated as today’s volume divided by open interest. This metric, available on our screener (as you can see below), provides a more comprehensive view of liquidity by factoring in both present-day activity and existing contract commitments.
When the number is high, it signals that the market is unusually active compared to its baseline. This can indicate temporary boosts in options liquidity, possibly due to news events or significant market developments.
Stock Volume Power
Stock volume power relates to the underlying stock of the options contract. It measures how today’s stock volume compares to its average volume, calculated as current volume divided by the average. On our screener, this is listed under the stock technical filter.
Why does this matter for options liquidity? The activity of the underlying stock often impacts the liquidity of its options. If a stock is trading actively, its options are likely to be more liquid as well, offering better opportunities for efficient trading.
Looking for Liquid Options – An Example
A simple example will likely clarify a few ways you can use our screener to find liquid options for trading. Imagine you want to identify particularly liquid options on the S&P 500. Here’s how you can create a custom scan step-by-step:
- Log in to the screener and click the “Compose New Scan” button.
- Choose a name for your scan, such as “Long Calls with High Options Liquidity,” and select the “long call” strategy from the dropdown menu.
Next, it’s time to set the filters. These parameters will help you zero in on liquid options effectively:
- Total Option Volume – This filter is key to finding active markets. Keep the default setting of “Above 5,000,” as it ensures you’re looking at options with sufficient trading activity.
- Bid-Ask Spread – A tighter spread signals better options liquidity. Set this to “Below 50 cents” or use the percentage option if that suits your style better.
- Open Interest – Go for options with the highest open interest. Pick “Above 10,000” from the dropdown menu to ensure active contracts.
- Total Open Interest – Similar to open interest but on a larger scale. Choose “Above 50,000” to narrow your focus to markets with widespread participation.
- Option Volume Power – This helps you spot options with abnormally high trading volumes. Set it to “Above Average” for better insights.
- Stock Volume Power – Options liquidity often depends on the underlying stock’s activity. Go with “Really Active (>200%)” for the best results.
Example Results
After applying these filters, the screener narrowed the results to two options contracts—a long call on AAPL and one on VZ, as you can see below:
These options showed high liquidity across all metrics, making them ideal choices for efficient trading.
It’s worth noting that these filters are by no means rigid. While our example is quite specific, you can loosen or tighten the settings depending on your trading strategy. For instance, if the output feels too limited, consider lowering the thresholds for open interest or total option volume. Or, if you prefer more liquid markets, raise the numbers a bit. If, on a specific day, you get no results, it could be useful to relax one or two filters until the market settles (or simply wait for more chances in the following days).
What Should You Remember about Options Liquidity?
We put down a few practical tips to help you spot liquid options on our screener in a matter of a few seconds:
- Use predefined scans or compose custom filters to find liquid options.
- Adjust filter settings like total option volume, open interest, bid-ask spread, and volume power to suit your goals.
- Flexibility is crucial—experiment to find what works best for your trading style.
This approach makes finding options with great liquidity a much more manageable task, improving your ability to spot opportunities and minimize trading costs.
