How To Scan For Liquid Options [Matt's Scanning Parameters]

How do I scan for liquid options? In this blog post, we will discuss simple scanning and trading strategies for the stocks that offer the most liquidity. Liquidity is an important factor to consider when trading options, as it can impact your ability to execute trades quickly and efficiently. We will also provide a list of the most liquid stocks on the market today! The most liquid options can be found on the stocks that offer the greatest volume and liquidity. When trading options, it is important to have a solid understanding of liquidity, as this can impact your ability to execute trades quickly and efficiently. In this blog post, we will discuss simple scanning and trading strategies for the stocks that offer the most liquidity.

How To Scan For Liquid Options [Matt's Scanning Parameters]
How To Scan For Liquid Options [Matt's Scanning Parameters]

What is Liquidity?

Option liquidity refers to the ability for the trader to enter and exit without losing tons of money. The most liquid options are those that have high volume and tight spreads. This means a large pool of buyers and sellers available at any given time, which leads to less slippage (the difference between the expected price of a trade and the price at which the trade is actually executed).

Why is Liquidity Important?

Liquidity is essential for two main reasons. First, it ensures that you can quickly get in and out of trades without losing too much money. Second, liquidity enables you to take advantage of pricing opportunities as they arise. For example, when there is high options volume and tight spreads, the market reacts quickly to news and events, which can create pricing opportunities.

Example of Non-liquid Options

Options that lack liquidity make it easy for retail investors to lose money. This can be hard to understand, so we will follow an example. The best way to spot a non-liquid option is to check the volume and open interest. The most obvious way to know if the option lacks liquidity is to just check the spread between the buyers and sellers. We can see in the example below bid is $1.15, and the ask is $1.40. This represents over a 10% spread which is the potential loss for entering and exiting the trade.

Here is how much money that could look like for one trade:

Buyer needs to enter the trade quickly, so they use a market order...

BUYING @ 1.40 * 100 = $14,000

For whatever reason, let us say it was a mistake, and the buyer needs to exit the trade quickly, so they use a market order...

SELL @ 1.15 *100 = $11,500

Because the spread was so wide, the loss for the trade was $2,500 with a $200 transaction cost.

This might not scare you, but if you look at the number of trades day traders make per week month, this loss from just the spread could be astronomical.

  • 10 trades = $25,000
  • 100 trades = $250,000
  • 1000 trades = $2,500,000

This is not money the trader can keep by targeting the right spreads, which we will discuss next.

non-liquid options

Example of liquid Options

Now let's look at how much the trader will lose if the option spread is tight. In the example below, we can see the bid is 5.36, and the ask is 5.42. This represents a 1% spread which is 1/10 the size of the previous example. We can assume from that math that the trader will be able to save 1/10 the amount lost from $2,500, which can bring the potential loss from the spread down to $250 plus transaction costs. Over 10, 100, 100 trades, let us see how much money that can add up to in the trader's pocket.

Savings for the Long term

  • 10 trades = $2,500
  • 100 trades = $25,000
  • 1000 trades= $250,000

Crazy right? Sometimes becoming profitable could be as simple as just trading a different stock.

example of liquid options

The Most Liquid Options

When looking for the most liquid options, it is essential to consider the underlying stock. The key is to find stocks that offer the most liquidity, are typically traded on major exchanges, and have high trading volumes. The minimum volume needed to create a tight spread is around 100 contracts per day. This number needs to be substantially higher if the trader has a larger account because they need to buy more contracts.

The following essential criteria for liquidity is an open interest which is the total number of outstanding contracts. The more open interest, the more liquidity an option has because the number of contracts needs to be potentially closed in the future. While open interest doesn't necessarily mean same-day liquidity, it could present liquidity in the future if those option traders decide to close those contracts later.

If these two factors are scanned for, they will allow retail investors to find tighter spreads which will lead to more money saved long term.

Lastly, it is essential to consider the time of day when trading options. Options traded during the morning hours tend to have tighter spreads than those traded in the afternoon. This is because more volume is traded during the morning hours, and traders are typically more aggressive when they have the liquidity to get in and out of trades quickly.

Scanning for Liquid Options

While searching for the top stocks with the most liquid options manually can take hours and take away from your trading, there are ways to use a scanner to find these stock options within seconds. Simple scan inputs using thinkorswim's option hacker.

Criteria below:

Delta: 0.5-0.7 - most options traders will be buying at the money options because they have the best liquidity. At the same time, we are scanning for call options that is just meant to help us find the proper option chain. It really won't matter if the results show up as call options, as this should mean the whole option chain is liquid.

Open interest: 50 - this doesn't correlate to same-day liquidity, but it helps to have this over zero.

Options Volume: 100 - this can be lower, but anything over 100 generally will present active options for accounts under $25,000

Days to exp: 15 - this is good for scalping and swinging and will give us a higher chance of finding a good set of active options with similar expiration dates that all have liquidity

Last: this will be more related to the account size of the trader, and the position size relative to the account should be considered in order to not have one trade blow up the account.

  • Small accounts at $1,000 = the last input should be 0.3 - this will allow traders to buy three contracts and not exceed more than 10% of their account size
  • Medium Accounts at $10,000 = the last input should be 3.0 - this will allow traders to buy three contracts and not exceed more than 10% of their account size
  • Large Accounts at $100,000 = the last input should be 30.0 - this will allow traders to buy three contracts and not exceed more than 10% of their account size

scanner results for liquid options

Scanner Results

After using the scanner for these three account sizes, we found stock options that had great liquidity for those accounts. What is essential to understand is option liquidity will change for some stocks week to week, but some ETFs and popular stocks will consistently maintain good liquidity.

The other main takeaway is that options for smaller accounts under $100 typically will be very tough to find tight spreads with. Smaller accounts have limited options, and when the market becomes volatile, those options even become narrower. The larger the account is, the more options for tighter spreads. This is the big problem with getting started trading with a small account; most traders are just fighting an uphill battle with many factors they cannot control.

Small Account Scan Options:

  • BB with a 10% spread
  • BBIG with a 10% spread
  • T with a 7% spread

Medium Account Scan Options:

  • GLD with a 1% spread
  • AA with an 8% spread
  • IWM with an 8% spread

Large Account Scan Options:

  • SPY with a 1% spread
  • TSLA with a 3% spread
  • QQQ with a 3% spread

It is important to understand these options will not remain at these liquidities, and they may change from week to week. At the time of this current scan, the market is extremely volatile, making it very hard for the smaller accounts to see spreads under 5%. In less volatile markets, this may be possible; that is why it is important to run the scanners every month or week.

Liquid Spread Trading Strategy

These spreads with a shorter expiration date will be best for quicker trades in the market, so we will finish this article by showing a simple options trading strategy. We call a zero line cross which can be applied to most indicators.

In the example below, we can see our Market Mover indicator flashes red twice right before the stock falls. This is programmed to show these zero line crosses from an oscillator. This can also be seen visually when the candlesticks turn yellow to blue. If you would like to try out the Market Mover for free for ten days, just click the link here. No credit card is required.

As we can see below, applying a simple trading strategy that indicates momentum can be used to scalp the market. When you have a liquid option to use, the trader will keep more of the profits and benefit from these short quick moves.

short quick trades

Trade with us!

If you're looking for a more sophisticated and educational options trading experience, look no further than "Market Moves Premium Options Trading Group." Our exclusive 7-day membership offers swing trading set-ups, fast text signals, and +100 hours of educational content. Plus, you'll have access to live trading sessions twice per day. So if you're ready to take your options trading to the next level, join us today!

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