Open Interest,Volume, Bid/Ask Question

[Amos]

I see a lot on this site and others where people talking about a certain criteria for OI(open Interest) and volume for strikes. My question is why even worry about those 2 metrics if the bid/ask is tight?

 

Now I have seen OI and volume on the low side but with a tight bid/ask spread less than 5 cents. If there is low volume and OI according to those 2 metrics why would the spread be less than 5 cents? Wouldn't that indicate a liquid market?

 

Edited August 3, 2016 by Amos

[Ordos]

I used to consider OI and volume leading for liquidity, these days I also look at the bid/ask and strongly prefer it to be less than 10% off either bid or ask depending on which side I'm on. However, all things being equal I strongly prefer there to be some OI too. A tight bid/ask could be just one market maker, and what if he decides not to market make as market conditions change? Then I can't exit a position easily. A larger OI/Volume indicate to me that there are (probably) at least be some other participants I could trade with.

But that's just my perception, maybe others could chime in?

[Yowster]

Usually, tight bid/ask spreads go along with decent options trading volume and OI - but there certainly may be some exceptions.  However, you also have to look at the underlying stock price, as a 0.05 width bid/ask is a lot different for a $20 stock than it is for a $100 stock

[Amos]

@Ordos

@Yowster

 

Thanks guys for the replies. You both make interesting points. Yowster I do see what you mean by the higher priced stock as the spreads can be wider for higher priced underlyings. Ordos thats a good point as I didn't think about 1 market maker. Thank you fellas for the replies.

[4tach]

On 8/3/2016 at 9:00 AM, Yowster said:

Usually, tight bid/ask spreads go along with decent options trading volume and OI - but there certainly may be some exceptions.  However, you also have to look at the underlying stock price, as a 0.05 width bid/ask is a lot different for a $20 stock than it is for a $100 stock

@Yowster   Trading volume and Open Interest (OI) seem to be important. Do you routinely look at those parameters as you finalize a trade? Would you move to a strike that has high OI to obtain a "more tradeable" position? Does a high OI make a nearby strike more favorable?