I have a question in the back on my mind. I have seen in sensex next month option trade (
) that their is no liquidity. Whereas in stock options there are trades for next month. (
) majority people do not place trades for next month for indices. Why ?
Is it viable/ feasible , does it make good sense to place trade for indices for next month and keep it even though their is no liquidity today knowing that soon their will be. What are the risks involved ?. I know that their are plenty of risks. Still is a question in the back of my mind which I want to bring it you.
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@sinhurry Hey, I’m no expert, but I’m trying to answer this.
Sensex is still a newer contract and traders mostly trade near month contracts for liquidity. The same applies to stock options as well. However, there are investors holding the underlying or domestic institutions that brings some liquidity for their hedging or other reasons.
Even if liquidity improves, since yu have gotten into the trade earlier, there’s premium delay.
If the trade did not go your way, there is no exit available or wide diff in bids and asks. Say, the price moves towards your direction, the premium will not move much due to low gamma.
Points in this article too.
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It is wise to stay away from illiquid index options which are far monthly. You may be able to enter trades by placing limit orders. However, when things go wrong you’ll have a hard time to exit or make adjustments.
For stock options though, low liquidity is not much of a problem if you use options for cash secured puts or covered calls (option selling). But, if you do price momentum based stock option buying to scalp quick profits, then high liquidity is a must.
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