Prepared by
Ira Epstein & Company
Back when I was a new broker, I confided to a more experienced colleague that I saw a big play coming in platinum options. When he was finished laughing at me, he explained that no one really traded platinum options: they were not liquid. Of course, I defiantly announced that I'd trade them–I wasn't afraid. He walked away shaking his head. I ended up not trading them. Here's why: sheer self interest.
Lack of liquidity usually means bad fills to you and me. Certain futures contracts are not widely traded–there just isn't that much interest in them. Lumber comes to mind. And the Mexican Peso. Now I'm not just picking on the Chicago Mercantile Exchange, other exchanges have their share of poor liquidity contracts, many of which are so obscure that even traders haven't a clue about them: propane, electricity, cheddar cheese, and broiler chickens are all authorized for trade by the CFTC–but I wouldn't try them.
Just about any commodity has a bid and an offer price. Say you want more for your home or car or pet iguana than a given buyer wants to pay. Your selling price is the offer or the “ask.” The buyer's ridiculous and insulting idea of your commodity's value to him or her is the “bid.” If three people make an offer to buy your house and they all really, really want it, you may get your ask price, or close to it. If only one poor person wants your iguana and you know he's extremely mean anyway (the iguana, not the buyer) you may have to lower your ask to dump the critter. That could be a bad fill–as opposed to the good “fill” on your house. More people trading usually equates to better fill quality.
Other factors in the problem we face with options–not only is there different expiration months to consider (as in futures) but also many different strike prices for each month. Fewer and fewer traders seem to pay attention to all these separate trading propositions. Now cut each of these trading pools in half to reflect call versus put interest. It can get pretty lonesome out there.
Suffice to say, that we want to trade liquid option markets–where we stand a reasonable chance of receiving “good” fills. So please, scratch platinum, broiler chickens and iguanas from your trading lists.
September 30, 1997
Ira Epstein & Company
223 West Jackson, 7th Floor, Chicago, Illinois
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Last updated on 10-03-97
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