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You will never* have any problems with liquidity on SPY, AAPL, or the large options -- there's enough market makers that you'll be able to trade. You might have to chase a price, or if there's a suden move get a fill you don't want, but liquidity is simply not a problem. There are firms that literally trade hundreds of thousands of contracts on those instruments. On the lower liquidity ones -- take notes. Some might only have an OI of 10 contracts, but there is six market makers competiting, and you get a fill at a much better point than the midpoint. My general rule of thumb is on low OI options, that i have not traded before, I ease into. Yes you pay more commissions the first go around, but you learn about it. Also ALWAYS start near the bid -- you might be suprised and get a fill, and then slowly adjust up to the midpoint, or just over. Pay attention to how long it takes to get the order filled, how long it sits there, the way the price moves on the spread as soon as you enter the trade. Also as a general rule, the wider the spread, the less likely you'll be able to easily get in and out (getting out is always harder). But again, simply because there is low OI, does not mean that it is not a tradeable instrument. The ones you have to watch for are the $10.00 stocks with a $2.00 spread on the ATM options. I wouldn't touch that with a ten foot pole. But if you have a $10.00 stock with only 2 contracts of OI, but the ATM straddle spread is only 0.05? You might be suprised how liquid it is. HOWEVER, that said, still ease in....you might get an instant fill at the best possible price, but have a hell of a time getting out. That's why trading logs are so important, you learn about the options you trade -- and the better feel you get for them the better.

Excellent question. There is no firm answer to that question. Higher allocation is definitely not an issue for high volume stocks like SPY, AAPL, CSCO, GOOG etc. Our last few stocks had less volume and OI. I think it really depends - some stocks will be easier to trade, some will cause issues with fills. While volume and OI will give you a good indication about liquidity, sometimes even with smaller OI you will get decent fills, and vice versa. In general, I would not trade more than 10-15% of OI. I think you can do few things: 1. Trade less size for less liquid stocks. 2. Set your own entry/exit targets - this is probably the most important. 3. Trade different strikes. 4. Trade different expiration - if I trade weekly, you can go for a monthly and vice versa. 5. In general, I do not recommend to chase, but if you still see good value, sometimes it's okay to go 1-2% higher than my entry. In some cases, you can just set different targets than me and exit before my alert. Over long term, it should level out. 6. Patience is a key. Many times the price will calm down after the initial spike. It might still be slightly higher than my alert, but with some patience, you might pay only 1% more instead of 2-3%.

Several people have asked questions on why they aren't getting fills on option prices -- particularly when they have a price at the ask, or even .01 or .02 over it. Take the following example: I was trying to get a fill on the FDX straddle at $5.78. I had a $5.78 limit order in. At one point the bid ask became 5.70/5.76, but I still did NOT get filled. How does this happen? My immediate reaction is like most people's, TOS must be screwing up, or I'm just getting screwed. While that MIGHT be the case, in this instance it was not. Everyone should know that there are MULTIPLE option exchanges. If you're doing a multi-leg order (straddle, strangle, IC, whatever), you have to match on one exchange. TOS delineates these different exchanges with different letters (A, B C, I, N, X, Z, etc.). However, when calculating bid/ask spreads, it takes the prices and combines them from all exchanges. So for instance, on stock XYZ, you might see the following Exchange Put Bid Put Ask Call Bid Call Ask Straddle Bid/Ask A $1.00 $1.10 $1.00 $1.10 $2.00/$2.20 B $1.01 $1.11 $0.99 $1.09 $2.00/$2.20 C $0.99 $1.09 $1.01 $1.11 $2.00/$2.20 HOWEVER, TOS would display the following Bid/Ask: $1.98/$2.18, as it selects from different exchanges. The software would then TRY to match the calls/puts across different exchanges, but you have no guarantees this will happen. So even though you have a limit order of $2.18 or $2.19, you might not get filled. Now typically prices will bounce around .01 or .02 and you'll get your fill, or maybe there's a perfect cross-exchange match. And in high volume options this happens all of the time. However in lower volumes, it frequently can sit for a while -- even at your brokers calculated Ask. You're only guaranteed a fill if you match the exchange.