New answers tagged liquidity
1
You are right to be concerned about this. The liquidity of many options is not as good as many people imagine. I have personally been in situations where a fund needed to liquidate a large option position and it was difficult to do. Once market makers detect a liquidity-crisis situation they pull back and the situation worsens. The liquidity of option ...
3
The three ways to manufacture pseudo-implied vols I know of are:
Find a related underlying and, even if only few options trade on it, 'borrow' its implied vols.
Compute statistical vol from historical underlying prices (not strike dependent, still useful to know).
Compute breakeven vol, still based on historical underlying prices, strike dependent, by ...
1
Bid Ask spreads should reflect the willingness of parties to exchange at a certain price, where market makers are the sellers it represents the risks they are prepared to take in order to make the the market, but as most trades now are through secondary sellers, not market makers or in dark pools, it would be impossible to estimate the initial risk of a ...
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