What Is an Illiquid Option?

An illiquid option is an options contract that cannot be easily sold or converted to cash quickly at the prevailing market price. Illiquid options have very low or no 澳洲幸运5官方开奖结果体彩网:open interest.

Because of this, holders of these options may not be able to dispose of them at a f꧒air price in the market and may be forced to hold on to their contracts until they expire.

Understanding Illiquid Options

澳洲幸运5官方开奖结果体彩网:Liquidity is the degree to which an asset can be quickly purchased or sold on the market. An option is a versatile security. Traders buy optio💜ns to speculate on their current holdings. Stock options will normally represent 100 shares. Options typically trade less frequently than their underlying aꦿssets, such as stocks or bonds.

An illiquid option has a very low level of liquidity. The liquidity of options is much different than those of stocks. The liquidity of stocks is typically judged by the stocks' 澳洲幸运5官方开奖结果体彩网:daily trading volume, whereas🍸 optiඣons are not necessarily traded as heavily. In fact, there can be hundreds of different contracts for options available on the market.

If you're holding an illiquid option, you will usually notice a very large bid-ask spread on the contract. This is because there are not en♍ough buyers—and therefore, not enough interest generated—to a♎ccommodate those wanting to sell.

How to Determine Illiquidity

There are generally two ways in which to 澳洲幸运5官方开奖结果体彩网:determine liquidity for an option. First is the daily volume, or how many times it was traded that day. The higher the volume, the more liquid it is, while ꦑa lower ꦅvolume will mean a lower level of liquidity.

The second way to determine liquidity is through 澳洲幸运5官方开奖结果体彩网:open interest. The higher the open interest, the more⭕ liquid the option will be. However, if there is very little open interest, that option can be deemed illiquid.

Disadvantages of Trading Illiquid Options

If you're going to try to trade illiquid options, you should be aware of the pitfalls of doing so. First of all, because there is a very low level of liquidity, the bid-ask spread will be much wider. That means you'll be relying on people in the market who want to hedge their bets in an environment that isn't highly liquid.

Chances are, you may have a difficult time trying to sell an option that is illiquid. If you're lucky enough to do so—if at all—there is a good likelihood that you'll be selling it at a discount instead of the market price—or the price at which you're willing to sell.

The Bottom Line

Illiquid options are option contracts with a very low level of liquidity, that is, they cannot be easily and quickly sold or exchanged for cash. Illiquid options fall into the high-risk category: they have wider bid-ask spreads and may be more challenging for investors to sell at a faiꦚr price in the market. Investors may be forced to hold on to their contracts until they expire.