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Liquidity

Liquidity is how easily an investor can buy or sell an asset without losing much value. The more an asset is traded, the more liquid it becomes.

At tastytrade, we only trade liquid products because as self directed investors, we want to trade the most efficient option markets. In addition, this allows us to get in and out of our trades at a fair price. As long as we stick to the most liquid products, we know we will give up little edge getting in and out of our trades.

Now that we understand the meaning of liquidity, it is important to understand the criteria we look for at order entry in order to decide whether a product is suitable to trade. It is important to assess stock and option volume before placing a trade. Because options are a derivative of stocks, if the stock has low volume, so will the options. In addition, the bid/ask spread will tell us how tight the markets are, and represent the prices we know we can get in and out of our trades at. Another important reason we trade products with extremely liquid options is because more liquid options have much more accurate probabilities (as calculated by the Black-Scholes pricing model).

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

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