When it comes to trading options that are illiquid or with large spreads there are some things you need to know. Going after options with large spreads isn’t really an options trading strategy, but is more so a factor you need to watch an take into account for every trade. Large spreads are one of the biggest mistakes people make on almost every trade, an is especially dangerous for day trading strategies, as large spreads kill your gains right when you buy in. A large spread can make you go negative the minute you purchase it. I explain what spreads are an illiquid options and what to take into consideration when trading these options an the pros an cons. The term I did forget to bring up in this video however though is slippage. Slippage is the difference between what you made in terms of profit on the trade, minus what you get filled out and commissions. This video is only 6 minutes long, so there wasn’t too much I could get into, however if you guys want me to go more in depth on large spreads, illiquidity and slippage, just let me know!
Also if you are a penny stock trader, these concepts of spread, slippage and liquidity apply the same. This is part of the reason why I said options are like penny stocks, as they have a lot of similar features, large spreads an illiquidity being some of them.
All in all though, be careful with options trading in general, as they are not as active as traditional stocks an equities, as a lot of people don’t buy them. This may sound surprising giving all the options trades you see daily, however relative to stocks the amount traded is quite miniscule. I explain this in another video so if you missed it make sure you watch it! Nonetheless, my biggest take home from all this is to always calculate your profits based on the bid. Don’t think you are up because the ask is high or the last trade went through higher than the bid. Be conservative so that you don’t fall into the mistake of making a bad trade or disillusioning yourself to think you are profiting way more than you think. On that same note, when looking to buy, factor in your risk management and plan based on getting filled at the ask price, instead of the bid or last trade. Finally the biggest thing to remember putting all of this together is how the price you pay for the option really determines how much you make. So if you get caught with large spreads and looking to buy, be careful to not overpay as this can greatly cost you. The funny part about options trading is that the same exact option produces a different level of profit for each trader, even if the stock moves up exactly the same, and that is based on how much you pay for the option.
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