Like The Roach Motel: Getting Into Options Trades May Be Easy: Getting Out, Not So Much

May 28, 2016   |   May 2016 Bond Updates
Traders are always discussing market liquidity and transparency, but I tend to analyze it on out-of-the money Options. The problem is, while initiating the transaction may be in a liquid market, a reasonable exit strategy can be very difficult to find. Frequently the most effective method  of liquidation can be by trading the underlying Stock, ETF or Futures Contract. Options markets tend to be much wider for in-the-money Options than out-of-the money. The reason, for the most part, is obvious. In the money Options have large Deltas which tend to, because of the movement of the underlying instrument, make it difficult to hedge. In illiquid Stocks, ETFs and Futures, wide markets on out-of-the money Options in volatile instruments may make sense. In a market like SPY (SPDR S&P 500 Trust ETF), the lack of liquidity for out-of-the money Options is difficult to understand.

View more at: http://www.forbes.com/sites/fredoltarsh/2016/05/27/like-the-roach-motel-getting-into-options-trades-may-be-easy-getting-out-not-so-much/
 
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