Explore Your OptionsQ&A
Explore Your OptionsGot a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.
PUT OR CALL: WHICH HAS THE MOST LIQUIDITY OF ALL?
Recently, a question came out of left field: What are the best options to buy or sell for a daytrader? In the world of option trading, there are the few who wish to daytrade options. Trading options is a skill, but daytrading them requires a different skill set. My first inclination was to answer “Don’t do it,” but in this industry, “don’t” and “can’t” are not in the trading vocabulary.
There are roughly 4,000 indexes, exchange traded funds (ETFs), and stocks that are optionable. Not all options are created equal. To answer the question, the first thing I did was head over to the CBOE (www.cboe.com) to look for an answer. There are options on familiar products such as index options and equity options, but that’s only the beginning. There are options on exchange traded products, and credit swaps, binary products, and even options on volatility. Chances are that if you’re an option trader and you don’t know what it is, you shouldn’t be trading it, let alone daytrading it.
Then there are index and equity options. I didn’t have to look far for index options. The information at the CBOE showed me that of the top 10 index options traded in 2007, the Standard & Poor’s 500 (SPX) traded more volume than the others combined. When I looked at the Standard & Poor’s SPDR ETF, it trades very high volume as well.
Penny pilot program
One of the best ways option traders determine liquidity is to look at the bid-ask spread. Many years ago, before technology made retail trading more efficient and at a lower cost, the average spread between liquid options was $0.25 to $0.50. So to buy and sell an option, a trader needed at least a 50-cent move just to break even when buying the offer and selling the bid.
In 2006, as more and more traders entered the options arena and spreads began to narrow, the CBOE started a new initiative called the penny pilot program. The program was created for very liquid options that trade with narrow bid-ask. This means that we now have options that trade at just pennies between the bid and offer. You can get a current list of these ultra liquid options by visiting https://www.cboe.org/hybrid/pennypilot.aspx.
As of this writing, there are 370 stocks and ETFs that are on the penny pilot list — definitely the top 10% in terms of overall liquidity, but will that work for the daytrader? Daytraders rarely trade out of the front-month options, and most recently they have been looking at weekly options to trade in and out of. Weeklys are a one-week expiration product that expire on Fridays. More information on weeklys can be found on the CBOE site.
I thought my answer could be found by looking at this list along with the penny pilot list to determine which stock options would rise to the top in terms of offering the least amount of slippage for daytrading. At the end, I was left with a handful of stocks, but I still didn’t have my answer.
Average daily volume—the answer!
Finally, I came across the average daily volume report, yet another report buried inside the CBOE website. Some of the treasures of the CBOE are for those who search them out, and I was rewarded with a long list of optionable stocks sorted by total average daily option volume. So as of Figure 1, Apple has the most liquid options by volume for short-term traders.
| Name | Symbol | Opt Sym | Call | Put | Total |
| Apple | AAPL | AAQ | 1,683,913 | 1,105,199 | 2,789,112 |
| FB | FB | 1,222,237 | 588,913 | 1,811,150 | |
| Bank of America | BAC | BAC | 1,028,846 | 486,313 | 1,515,159 |
FIGURE 1: LIQUID OPTIONS BY VOLUME
Now, I am not advocating daytrading; it’s an art that takes a while to master. Looking at this information on a monthly basis would be a good place to start analyzing liquid options. Another way is to create a one-minute option chart of an at-the-money (ATM) call or put you’re interested in trading. A chart with gaps is a good indication that it’s not worth daytrading; the spreads would be too wide.
One more thing not to overlook: commissions and slippage. The deep out-of-the-money (OTM) options have less slippage, but the commissions will offset any profits or add to any losses you might have on a percentage basis. Deep in-the-money (ITM) aren’t the best either, as the spreads will start to widen on even the most liquid options. I’d say stick to the ATM options. Good luck to all you option daytraders—you’ll need it!