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przemyslaw-radomski

Volume is so important on stocks - does volume influence your option picks?

April 15, 2010, 12:00 PM Przemysław Radomski , CFA

Thank you for your feedback.

It is very unrealistic that nobody would want to buy in-the-money options, if you wanted to sell them. Such situation would create an opportunity for arbitrage, and this is an uncommon phenomenon - theoretically it should not exist in an efficient market. There are the transactional costs, etc. but in the end, if the intrinsic value of an option (difference between price of the underlying equity and option's strike price) and the price of the underlying equity (here: stock) would get to far from each other, one could make a no-risk profit by purchasing/selling option or stock and selling/buying the other (opposite transactions). As we all know, there is no free lunch in the market, so the value of options must stay in tune with the underlying equity. Therefore, in-the-money options will have value and there will be buyers eager to buy them from you, unless their price is lower than the transactional costs

Therefore, volume is not that important when we're talking about options only. With options it is usually the bid/ask spread that is more important. Still, even if the bid/ask price would be around 4.00 / 5.00, you would most likely be able to sell for about 4.4 and buy for 4.6 or so (not necessarily immediately). When buying here, it is usually best to start with 4.05 and then increase this limit by 0.05 every few minutes (not applicable if market is moving up fast). Most times you will see that there was someone on the other side that wanted to sell their options but didn't place their order.

Additionally, you may want to read also this reply.

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