The Importance of Option Liquidity: Volume & Open Interest - Singapore Forex Trading, Singapore Forex Academy, Singapore Forex Association

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The Importance of Option Liquidity: Volume & Open Interest

An option's volume and open interest are very important to you as an options trader because you do not want to get caught trading illiquid options (low volume and low open interest). Illiquid options tend to have wide bid-ask spreads, which can single-handedly wipe out a trading account over time. Additionally, it's harder to get out of option positions at good prices when volume and open interest are low, which means losses may grow larger due to the inability to exit a position.
What are ideal levels of volume and open interest? At the bare minimum, the options you use for your positions should have volume in the hundreds and open interest in the thousands:
Minimum Daily Volume: 100s, preferably 1,000s.
Minimum Open Interest: 1,000s.