tasty BITES

Illiquidity: A Drag on Profits

| Aug 31, 2016
Up Next
    tasty BITES

    Illiquidity: A Drag on Profits

    Aug 31, 2016

    There are several important parts to the tastylive trading philosophy. We say “trade small and trade often” so your number of occurrences will be high enough. We believe in selling premium to take advantage of Theta (time decay). We stress the importance of selling in high Implied Volatility (IV) environments. More important than any of those though is liquidity. Subscribers to BOB the Trader receive a stock list that has a liquidity indicator for each stock. Our dough platform also contains a liquidity indicator. So why is liquidity so important and especially so for tasty BITE traders?

    Tom began by noting that, “Our biggest positions are on the most liquid underlyings and our most profitable YTD P/L is on the most liquid underlyings. They present the most opportunity for success.” A table of the bid, ask and the spread between the two for the at-the-money (ATM) Put with 51 days to expiration (DTE) for several different underlyings was displayed. The underlyings were SPY, XME, AAPL, CAT and SCTY. The table showed what can be a drastic difference between the bid-ask spread of SPY ($0.01) to SCTY ($0.61), a lighter traded stock with takeover news. A tighter Bid-Ask Spread is a sign of greater liquidity which enables us to know the current “fair price” and limits what we have to “pay up” at either order entry or upon exiting a position. That is especially true for spreads and the more legs a spread has the more liquidity is important.

    A bar graph demonstrated why we prefer the standard option expirations as compared to the weeklys. Even in two of the most liquid underlyings, SPY and XME, there is a notable difference in the bid-ask spread between the regular expiration and the weeklys. Time is another important factor. The farther one goes out the less liquidity there is. That’s another reason to sell options with around 45 days to expiration (DTE).

    For more information on Liquidity see:

    Watch this segment of tasty BITES with Tom Sosnoff and Tony Battista for the important takeaways and a better understanding of the importance of trading liquid underlyings, especially in a tasty BITE-sized account.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

    More like this

    tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.

    tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

    tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

    tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

    © copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.