I want to tell you about one of the most silent mistakes people make when they start trading options. I’m not talking about getting the direction wrong, or buying a call and watching the stock drop. I’m talking about something far less obvious that can make you lose money even when your analysis is good: liquidity. You can pick the right strike, the right expiration and even nail the move, but if you trade an illiquid option you can start losing from the very first second.
The price you see is not the price you trade at
Many beginners look at whether the premium seems cheap and how much they could make, but they don’t check whether they can actually get in and out of that trade at a reasonable price. And in options this is key: the price you see on screen is one thing, and the price at which you can really buy or sell is another thing entirely.
In a highly liquid stock, the difference between buying and selling is very small (the market’s natural spread). But in options each stock has several expirations, each expiration many strikes, and each strike its calls and its puts. Liquidity is spread across all of them: some contracts have plenty of activity and others are practically dead.
Bid, ask and the spread
The first thing you should always look at is the bid and the ask:
- Bid — the price at which someone is willing to buy the option from you
- Ask — the price at which someone is willing to sell it to you
- The difference between the two is the spread: one of the most important and most ignored costs in options
An option with a bid of 1.00 and an ask of 1.05: the difference is small, reasonable. But another with a bid of 1.00 and an ask of 1.40 (mid price 1.20): you might think it’s worth 1.20… but to buy it you’ll pay close to 1.40 and to sell it you’ll be close to 1.00. If you buy it and wanted to sell it two seconds later —without the stock having moved— you’ve already lost a lot just on the spread. That hole is created by poor liquidity.
Getting in is easy; getting out is the hard part
With options it’s not enough to say “I like this premium.” You have to ask yourself at what price I can really get in and, above all, at what price I’ll be able to get out if I need to close it. Opening a trade is usually easy; the tricky part is often getting out. And liquidity tends to dry up right when everyone wants to close or when the expiration is coming to an end.
Watch out for the last price
Another very common mistake is looking only at the last traded price (the last price). An option may show a last price of 2 dollars because that was the last trade that crossed… but maybe it was hours ago, and right now the bid is at 1.60 and the ask at 2.40. Is it really worth 2 dollars? No: that’s the price where the last order was executed, not what it’s worth now. What matters is looking at where the bid and the ask are, where the real market is.
Volume and open interest: not the same thing
- Volume — how many contracts have been traded during today’s session
- Open interest — how many contracts are still open
An option can have a lot of open interest but little volume today; or the other way around, a one-off volume from a specific “whale” trade while not being liquid. That’s why it’s ideal to look at several signals together: reasonable bid/ask, sufficient volume, decent open interest and strikes with tight spreads. If you see an option with a huge spread, zero volume and very low open interest, stay away.
Even if options are available, it doesn’t mean they’re actually tradable. A company can be excellent as an investment and, at the same time, have a horrible options chain. Liquidity decides whether that chain is tradable or not.
In multi-leg strategies, even more critical
This becomes much more important when you build multi-leg strategies — spreads, iron condors, calendars, diagonals. Every time you buy and sell a contract you keep accumulating spread, so the costs multiply. And if just one of the legs has poor liquidity, it can ruin the whole trade.
Very often the risk graph (payoff) looks perfect, but when you try to execute the trade it vanishes. So, before you fall in love with a strategy you’ve put together, always check the liquidity before executing it.
In options, as a general rule, don’t trade with market orders — not even on the super liquid ones. Always use limit orders to avoid slippage and wider spreads. On a platform like ProRealTime you can see the bid, the ask, the volume and the open interest of each contract before placing the limit order.
The questions that save you from bad trades
Before building the strategy
Can I get in and out cleanly?
Does the spread (bid/ask) make sense?
Is there volume?
Is there open interest?
Is the price I see real or fictitious (an old last price)?
Liquidity is not a tiny detail: it’s part of the trade. You can’t leave it for “I’ll check it later” — you have to look at it before building the strategy, before calculating profits and even before getting excited about the premium you’re going to collect.
Conclusion
Trading options isn’t about chasing premiums: it’s about understanding risk, probability, time and, of course, liquidity. The price you see on screen isn’t always the price you’ll be able to trade at, and that difference —the spread— is a real cost that’s ignored far too often. Ask yourself the right questions before getting in and you’ll save yourself a lot of bad trades. And if you want to see another case where getting the direction right isn’t enough, take a look at the article on how to trade around earnings and the IV Crash.
