 Hey guys, this is Hydrofemex trades and in this video we're gonna go over options liquidity and What it is and how it can affect your options trading? So first let's go over what option liquidity is so options liquidity is basically how easy it is to buy Options contracts buy and sell them without actually having a big impact on the prices itself so for example Let's take a look at Apple Apple is a big cap stock right and Apple trades Millions of shares every single day, so I could buy a million of a million shares of Apple buy and sell them instantly and I would be able to do that very easily right, but if I'm buying a penny stock I'm not gonna be able to buy a million shares because there's not gonna be that much flow and like volume available, right? so a Small cap stock or a penny or penny stock won't be as liquid because it'll be hard to get in and sell Those shares immediately, but with the big cap tech stocks that are very liquid like Apple You can buy and sell very quickly and not impact the price of Apple If I was buying a million shares of penny stock, then that would impact the price a lot, right? That would probably spike the price a lot. So Yeah, being able to get in and out very quickly is basically what liquidity is and You have stocks that trade a lot of volume very liquid and stocks that don't trade a lot of volume or illiquid All right, so now that we know what liquidity is. Let's talk about options liquidity And how to tell if an option is liquid or not So there's three main things The bid ask spread the open interest and the volume so the volume is the total number of contracts traded and Open interest is total outstanding contracts. So for both open interest and volume higher open interest and a higher volume means more liquid and Now let's talk about the bid ask spread. So the bid ask spread is the difference between the bid and the ask price of the Option contract. So the tighter or narrower the spread is the more liquid that contract is and Vice versa as well. So now let's take a look at an example. So IOT is a stock That's relatively illiquid or at least for options So the bid ask spread here is 15 cents apart and the volume here is 41 and the open interest here is 4 Now, let's take a look at SPY and compare that to IOT So SPY the volume is 49,000 open interest is 10,000 right? For IOT was like 40 and 4 so that's a really big difference and the spread here is only 2 cents for IOT was 15 cents So SPY is definitely a more liquid stock just because it has so much more volume so much more open interest And the spread is also a lot tighter, right? So that's a very clear way that you can tell the difference between liquid stock and illiquid stock for options and also The options themselves can also have different like for example This one's the most liquid one right has the most volume for SPY and typically if you're playing in the money They typically tend to be a little bit less liquid and also out of the money They also tend to be a little bit less liquid. So for example SPY here SPY in the money call has only 791 volume compared to this one which has like 50,000 right? So there's a big difference between the liquidity of this one and this one and another way You can tell it's also open interest open interest here is also a little bit less And then the big easiest way you can tell is like the spread here the spread here is 14 cents the spread here is only 2 cents, right? so Again the spread is the difference between the ask minus bid so 251 minus 249 2 cents here 14 cents, right? So those are the three ways you can tell Or you can easily assess how the good an option is for a stock and The factors that affect liquidity are tight spreads. So we just talked about this Small bid ask difference means more liquidity and the underlying stock itself, right? So SPY trade to millions and millions this year so every single day IOT does not do the same. So therefore SPY Is very likely to have more liquidity for options compared to IOT, right? So the stock itself has to be liquid as well And volatility impact so if a stock is very volatile Then there's a very good chance that it's gonna attract traders and make those option contracts also more liquid. So for example Coinbase had a really strong move up recently and that attracted a lot of traders and its options have been Yeah, it's option that the liquidity has increased a lot compared to how it was before when I was just chopping around and was very Or had lower volatility And some other things you have to consider are expiration dates. So near-term options. So weekly contracts tend to have less liquidity compared to Options or expiration date dates that are at least like a month out or two weeks out. Yeah, so Typically you want to be buying you don't want to be buying weeklies unless you're day trading That's completely fine, but Typically if you're trying to find the best liquid options, then you want to go out a couple weeks or a month and liquidity risk So you have to make sure that you aren't buying Options that are illiquid because if you want to get in and out quickly, then that's going to be a problem for example, if I buy SPY In SPY contract, I'll be able to sell that immediately for like the same price So I won't lose much if I wanted to buy and sell at the same time They're right after right But if I do this for a liquid stock like high OT then it would be a bit harder So if I bought for 250 and I wanted to sell immediately even the even though the price didn't change I probably won't be able to sell for 250 just because it's an illiquid stock And I won't have anyone else buying for 250. So I'd probably have to buy or sell it for a small Walls for like 235 But yeah, that's basically the liquidity risk that you have to take into account when you're buying illiquid stocks and Now we're gonna talk about why Not all stocks have options so there's certain criteria that are set by option exchanges and If those stocks meet those criterias, then they'll have options. Otherwise, they won't have options So the main reasons why a stock might not have options is because lack of liquidity So if it's just doesn't trade that many shares every single day Then likely we'll have the options feature and if it's a low share price or penny stocks and If it's a small cap small cap stock, then also likely it doesn't trade that many shares So Also probably won't have options then and volatility. So if a stock is very it has very low volatility Then it's also likely that it won't have options But there is one important thing to know that stocks that didn't have options in the past Mike and options if they start becoming more highly traded or they meet the criteria set by the option exchanges Yeah, that's pretty much all you need to know about options liquidity. I hope this video helps and Yeah, thank you guys for tuning in There's a reason why x-trades is currently the fastest growing application on the market for sharing financial ideas With over 2.5 million dollars paid in the last two years to contributors Users are flocking to see what trades the top traders on the leaderboard are sharing in real time If you're looking to grow your reputation as a trader on the internet or discuss your trading ideas with other reputable investors Click the link below and get connected with the trading mentor today completely free of charge