InvestorQ : How big a worry is liquidity when it comes to futures and options?
Archita Jajjoo made post

How big a worry is liquidity when it comes to futures and options?

Answer
user profile image
1 year ago


More often liquidity is not a major concern in liquid indices or in frontlines stocks or even in the near the money strikes. But vanishing liquidity is a problem in futures and options. Have you seen vanishing liquidity in futures and also in certain option strikes? It does not happen in the case of large stocks but many mid cap stocks and especially small caps that are closely held are vulnerable to vanishing liquidity. This trend is more evident in times of market sell-off when the futures can trade at huge tick spreads. Vanishing volumes create a huge spread risk for you. This is where many traders tend to get caught. Apart from mid cap and small cap stocks, this problem of weak liquidity is seen in many stocks where the floating stock is too low and can be cornered. Also, in case of deep in the money strikes and deep out of the money strikes, liquidity can be a worry