| The Importance of Liquidity when trading options
Liquidity refers to how actively traded a particular market is. The more contracts that are traded the more liquid it is said to be.
Why is this important to option traders? The bid/offer spread (price difference between what the buyer is willing to pay and what the seller is willing to receive) is closer in a liquid market which means you are more likely to receive a fair price when entering into an option trade.
As important as it is to enter the market at a fair price, it becomes crucial when exiting a trade, as a result of risk management considerations. If you are trading a thin, illiquid market then you will more than likely have to pay more or receive less when you are forced to exit a trade.
This is one reason why we choose to trade the US commodity markets over Australian markets. The liquidity is deep as the markets we trade are mature and are traded by market participants all over the world.
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