For all the methods tools that professional options traders use to evaluate trades, nothing matches the importance of liquidity. When the market isn’t liquid, the chances of making money in the long-run is significantly compromised. It isn’t difficult to calculate liquidity. Just compare the Ask and the Bid of the Call and calculate as a percentage. The narrower this spread, the more liquid the option. Of course, a smart trader also needs to look at the Delta of the option. This analysis isn’t difficult for experienced traders, but is essential in order to maximize your chances of making money.
- The number of tools used by professional options traders is numerous because they have to get it right when evaluating the worthiness of a prospective trade.
- Some of the factors that are important if one is trading options in an illiquid market are fundamental analysis, charting, and implied and historical volatility.
- The long term success of traders depends on liquid markets because if markets are not liquid, their success is then compromised.
“The wider the spread, the more difficult it is to make money. For example, if an option has a Bid of 1.00 and an offer of 1.15 then it has a 15% spread. Depending on the Delta (the movement of the Option Value compared to the movement of the underlying contract) of the Options, you have to have a significant move in your favor to make money.”