i've heard several ways to put a metric on liquidity of options.. obviously liquidity isn't a constant.. things like the Bid/Asks spread, liquidity of the underlying.. Trying to find a way to parameterize "liquidty" for scans... instead of contracts traded.. would some average of total dollar amount traded in some front part of the term structure work? does open interest say something as well?
I would look at the following metrics when quantifying "liquidity" in listed options:
- bid/offer spread
- number contracts traded and from that follows notional traded (in the option not underlying)
- frequency of bid/offer adjustments relative to changes in the underlying delta.
- frequency of liquidity added/removed on the bid and offer side even when no trades occur
- amount of liquidity added/removed on the bid and offer side even when no trades occur
- frequency of changes in spread dynamics
Most of the points above pertain to the fact that a lot of liquidity behind a contract is not shown on the screen, it shows however in the participation rate and dynamics of market makers and those who qualify for waivers of cancel/modify charges.
As an aside, I would not look at liquidity in the underlying. The underlying may be highly liquid without much interest in the options.