What is ‘Illiquid Option’
An option contract that cannot be sold for cash quickly at the prevailing market price. Illiquid options have very low or no open interest.
Explaining ‘Illiquid Option’
Most options are illiquid when they are far away from their expiration dates. If you’re holding an illiquid option, you will usually notice a very large bid-ask spread on the contract. This is because there are not enough buyers to accommodate those wanting to sell.
Unfortunately, if you are trying to sell an illiquid option, there is a good chance you’ll be selling at a discount, if at all.
- Illiquidity premia in the equity options market – academic.oup.com [PDF]
- Pricing options in an extended Black Scholes economy with illiquidity: Theory and empirical evidence – academic.oup.com [PDF]
- Calibration of the SABR model in illiquid markets – www.tandfonline.com [PDF]
- Option pricing with an illiquid underlying asset market – www.sciencedirect.com [PDF]
- Risk management for derivatives in illiquid markets: A simulation study – link.springer.com [PDF]
- Optimal portfolio choice and the valuation of illiquid securities – academic.oup.com [PDF]
- Marketability and value: Measuring the illiquidity discount – papers.ssrn.com [PDF]
- Fear of fire sales, illiquidity seeking, and credit freezes – academic.oup.com [PDF]
- Options illiquidity: Determinants and implications for stock returns – papers.ssrn.com [PDF]