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| Advanced Options Concepts: Liquidity |
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Options strategies must be applied in specific market conditions to be money-makers. Liquidity is one of these market
conditions. Liquidity is the ease with which a market can be traded. A plentiful number of buyers and sellers boosts the
volume of trading producing a liquid market. Liquidity allows traders to get their orders filled easily as well as to quickly
exit a position. The best way to discover which markets have liquidity is to actually visit an exchange. The pits where
you see absolute chaos are markets with liquidity. As long as there are plenty of floor traders screaming and yelling out
orders as if their lives depended on it, you will probably have no problem getting in and out of a trade. However, I tend to
avoid the pits where the floor traders are falling asleep as they read the newspapers. These are obviously illiquid markets
and it would not be a wise move to place an options-based trade there. If you don't have the ability to actually visit
an exchange, you can still check out the liquidity of a market by reviewing the market's volume to see how many shares have
been bought and sold in one day. As a rule of thumb, I choose markets that trade at least 300,000 shares a day, although one
million shares a day is even better. It is also vital to ascertain whether or not trading volume is increasing or decreasing.
This kind of volume movement is studied to indicate turning points in market price action. You can also monitor liquidity by
monitoring the buying and selling of block trades-orders of 5,000 shares at a time-by institutional traders. For more information on learning how to make money with options, go to the Optionetics.com full site! We empower investors through knowledge. |