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Based on my experience option liquidity is not as crucial an aspect of
option trading that you would think. I would say that timing and price was
more important a factor than liquidity. I have traded Orange Juice Options
and done so successfully. They are very illiquid as you might guess. I had
an OJ put option that I bought in a down trend when the volatility was very
low. It got into the money and I decided to put a profit stop in for it. The
next day OJ dropped like a rock going through my profit stop. Guess what?
There was no slippage at all when I had something that somebody wanted, they
snapped up my option like a killer whale eating a sea otter.
Because of the auction like action of option trade if you are offering a
price that someone likes you have no problem selling. Buying however is when
YOU want to like the price, and it takes a little effort to get a good
price. As I've said before I expect to take a small loss most of the time
when I first buy an option it's just natural. A word of warning buying early
in the session is NOT usually a good idea unless you are day trading
options.
Interestingly many of my winning option trades were made on Friday which is
not usually the time that you would want to buy because you are going to
lose 2 (or more) days of time value before Monday.
I'm sure that someone is going to say that liquidity is everything and I
agree it is important and helpful, any option that has 250 volume in day
trade I would think should be fine. It's when it's less then about 30 to 50
that you are going to want to be more careful.
Brent
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