Bid-ask spread, volume, and open interest

Summary

Bid-ask spread, volume, and open interest are practical liquidity measures used to judge whether an option chain is tradable. The article treats them as exclusion checks, not optional refinements.

Definition

Bid-ask spread, volume, and open interest are common indicators of options liquidity and tradability. The bid-ask spread shows the gap between the best displayed buy and sell prices, volume shows recent trading activity, and open interest shows how many contracts remain open. In the article, these measures are used to rule strategies out before entry if the chain is difficult to trade efficiently. Poor liquidity can make attractive-looking premiums misleading because execution costs rise, exits become harder, and adjustments may be impractical. The framework also stresses strike availability and usable liquidity in the chosen expiry, not just in the nearest month, because strategy quality depends on being able to enter and manage the position at reasonable prices.

Sources

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