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Illiquid Option

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.


Further Reading


Illiquidity premia in the equity options market
academic.oup.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …

Pricing options in an extended Black Scholes economy with illiquidity: Theory and empirical evidencePricing options in an extended Black Scholes economy with illiquidity: Theory and empirical evidence
academic.oup.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …

Calibration of the SABR model in illiquid marketsCalibration of the SABR model in illiquid markets
www.tandfonline.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …

Option pricing with an illiquid underlying asset marketOption pricing with an illiquid underlying asset market
www.sciencedirect.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …

Risk management for derivatives in illiquid markets: A simulation studyRisk management for derivatives in illiquid markets: A simulation study
link.springer.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …

Optimal portfolio choice and the valuation of illiquid securitiesOptimal portfolio choice and the valuation of illiquid securities
academic.oup.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …

Marketability and value: Measuring the illiquidity discountMarketability and value: Measuring the illiquidity discount
papers.ssrn.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …

Fear of fire sales, illiquidity seeking, and credit freezesFear of fire sales, illiquidity seeking, and credit freezes
academic.oup.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …

Options illiquidity: Determinants and implications for stock returnsOptions illiquidity: Determinants and implications for stock returns
papers.ssrn.com [PDF]
… When sorting stocks into quintiles based on this measure of option illiquidity, we find that the … portfolio that goes long the most illiquid contracts and short the least illiquid contracts earns a … Using daily returns, the average risk-adjusted option return spread for at-the-money (ATM …



Q&A About Illiquid Option


How does liquidity affect a market?

A liquid market has ready and willing buyers and sellers, while an illiquid market does not.

If you're trying to sell an illiquid option, what's the chance of selling it at a discount?

There is a good chance you'll be selling at a discount, if at all.

What is an illiquid option?

An illiquid option is an option contract that cannot be sold for cash quickly at the prevailing market price.

Why are most options illiquid when they are far away from their expiration dates?

Because there aren't enough buyers to accommodate those wanting to sell.

Why is cash considered the most liquid asset?

Cash can be used immediately for economic actions like buying, selling, paying debt, meeting immediate wants and needs. It has no wait for a suitable buyer of the cash. There is no trade-off between speed and value. It can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs.

How will you know if you're holding an illiquid option?

You'll notice a very large bid-ask spread on the contract.