Saturday, March 11th, 2017

options – how low of an open interest would it be safe to trade in?

My question has to do with the liquidity of an option contract. How low of an interest would be safe to open for trade in buying and selling a call option? Many of the options that interest me – the strategy to use – are about 300-700 open interest, with few or zero volume. Just wanted to see how low open interest would be nice to run my operations without any problem.

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7 Responses to “options – how low of an open interest would it be safe to trade in?”
  1. Nitin G says:

    Low Open Interest in any options = No liquidity. Not easier to square up the positions in such counters.
    Don’t trade is the only advice in such a scenario.

    And if you wish to maintain stop loss – this is simply not possible due to hugh swings in prices of such options.

  2. Warren534_FuturesTrader says:

    Market makers are required to make a bid and offer on all exchange traded options in lots of 10 options (1000 shares). Not sure what your strategy is, but if it only requires a max of 10 options in a particular option, then shouldn’t be any liquidity issue. The issue is really the bid/offer spread – the more volume/open interest, the tighter the spread.

  3. Michael says:

    It really depends upon what your strategy is. If you are doing covered calls and have no intention of buying back the sold call, then go ahead. If your strategy requires you to close the option trade before expiration, then go for options with much higher open interest.

  4. James says:

    It is not exactly true that low open interest = no liquidity.

    All options start with zero open interest and then build it up as it gets more and more traded. The liquidity of an options contract is really a combined function of its open interest and bid ask spread. In fact, the narrower the bid ask spread, the more liquid an options contract usually is due to the fact that market makers are fighting more closely for customers. In fact, there are very heavily traded options contracts that maintain very low open interest due to the fact that positions are opened and closed very quickly as well.

    As such, it is ok to judge liquidity based on open interest and trade only contracts with heavy open interest but it is not totally correct to say that options with low open interest are options that have no liquidity either.

  5. David says:

    Need Help!!!!

    I’m new at trading and not sure what I did wrong . I use TOS

    This past Friday I was on the OEX weeklys. Market closed at 500.56

    Using a Credit Spread, I sold -20 Vertical OEX 100 (Weeklys) JUL5 10 490/495 Call@4.95.

    I also used the iron condor in TOS and sold, sold -20 Iron Condor OEX 100 (Weeklys) JUL5 10 495/500/490/485 Call@485.

    The option expired worthless and my account was credited 20K. Sunday night the money was debited from my account because I did not exercise the option. How can I avoid this in the future and really make a profit? Is this a Bear Call Spread? HELP…..

  6. Glenn says:

    Related question: what if the Open Interest is zero, I see a lot of stocks option strikes and expirations that have this and wish to buy. Can the option be bought and later closed out or sold 100% of the time. I read somewhere the market makers will complete the transaction no matter what?

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