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?

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    $\begingroup$ for me, it's the spread. i could care less about anything else going on in the market so long as it's easy to trade without getting raped by the MMs $\endgroup$ – user3232 Feb 15 '13 at 6:41
  • $\begingroup$ I found a paper on it... think about the spread as a cost function to a market maker.they typical hedge with other options if at all possible so.. the frequency of trades/volume. That should give me relative liquity the best.. $\endgroup$ – cdcaveman Feb 15 '13 at 7:09

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.

  • $\begingroup$ is there a quick and dirty way to filter a large list? i'm not moving markets with my size.. $\endgroup$ – cdcaveman Feb 16 '13 at 6:16
  • $\begingroup$ you mean for your scanning application? Well if you take a real-time approach then you need to update each metric on every new incoming bid or offer anyway, so I do not see a problem with that (unless you subscribe to the whole OPRA feed within Excel. $\endgroup$ – Matt Feb 16 '13 at 7:16
  • $\begingroup$ That's to difficult for the lever $\endgroup$ – cdcaveman Feb 16 '13 at 8:29
  • $\begingroup$ lever? Well, if your setup cannot handle incoming real-time data on a grand scale then you need to either a) limit the number of symbols you subscribe to, or b) refocus your effort away from attempting to capture real-time analytics. $\endgroup$ – Matt Feb 16 '13 at 8:45
  • $\begingroup$ sorry my post didn't go through from my phone last night. i'm not looking for something as granular as has been discussed..i need a list generated from simple data attributes available from the net,IQfeed, or my broker IB... $\endgroup$ – cdcaveman Feb 16 '13 at 18:41

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