Why Liquidity is Important | OptionsANIMAL

Why Liquidity is Important

A student contacted me this past week with a problem. He had entered long calls on HELE on a purely directional play back in April.

He bought HELE Aug 30 LC @ 1.60 that were worth only 0.40 when he contacted me. His big question to me was, “How do I get my money back?”

Never mind that he didn’t protect himself at entry with a spread trade, or a clear exit strategy. I was presented with a problem and was asked to help solve it. The first thing I did was look at my alternatives. Could he adjust this into a Call Calendar and take in some credit against his LC? I quickly found that volume was the real issue!

  • There simply was no volume on the HELE options.
  • The open interest was negligible.
  • The average daily volume on the stock was less than 200,000.
  • The bid – ask spread was huge.

Although he could place a GTC order to sell a near month call he would likely need to go ITM to generate any credit to speak of. And, most importantly, was he likely to get a decent fill on that order? Looking at subsequent months, the volume and open interest was no better.

Lesson: We establish minimum daily volume for a very important reason. If it’s too “thin” it will be hard to adjust!

Emilu Bailes
OptionsANIMAL Instructor

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Emilu Bailes

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