Hi Kris - this is a great thread! Quick question: how important is (il)liquidity in options when making risk-defined trades such as credit/debit spreads or buying single call/put options? Thanks!
Typically you should get a tighter price for a spread than an outright because a mm has less delta and vega risk.
This advantage can be offset by the fact that there's a fixed cost per contract and because a spread has less risk you'll likely trade more gross contracts than if you traded a single outright.
A general word on how liquidity impacts the trade. Suppose the tool says that an option with 40% IV has a healthy premium to a realized vol of say 32%. But the option vega is .01 and the bid ask is 8 cents wide or 8 volts wide. If you sell the bid you are selling 36% vol not 40%
Hi Kris - this is a great thread! Quick question: how important is (il)liquidity in options when making risk-defined trades such as credit/debit spreads or buying single call/put options? Thanks!
Typically you should get a tighter price for a spread than an outright because a mm has less delta and vega risk.
This advantage can be offset by the fact that there's a fixed cost per contract and because a spread has less risk you'll likely trade more gross contracts than if you traded a single outright.
A general word on how liquidity impacts the trade. Suppose the tool says that an option with 40% IV has a healthy premium to a realized vol of say 32%. But the option vega is .01 and the bid ask is 8 cents wide or 8 volts wide. If you sell the bid you are selling 36% vol not 40%