Exploring the Impact of High Option Volumes
High option volume mainly affects liquidity: contracts that trade heavily usually have tighter bid/ask spreads, so you can enter and exit closer to fair value. Unusually high volume compared with a contract's normal level can also signal news, hedging, or a large position being built, and it often coincides with higher implied volatility. Volume alone does not tell you whether traders are bullish or bearish, so read it together with open interest and price. In Excel, MarketXLS formulas such as =TopOptionsByVolume("SPY") list the most actively traded contracts for a symbol. This article is educational, not investment advice.
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Options Market and Liquidity
The options market is a highly liquid market, as options prices are continually adjusted in response to the supply and demand of investors. When options trading is high, investors experience higher liquidity benefit as the costs associated with trading options are lower since more people are selling and buying. This can be beneficial for options investors, as they may be able to purchase or sell the options at a more favorable price.
High option volume often coincides with higher volatility. Volatility is a measure of how much the price of an asset can change over a given period of time. Heavy volume and rising implied volatility tend to appear together around news and events, though volume does not by itself cause volatility.
Impact on Option Investors
High option volumes can have both positive and negative impacts on option investors. On the positive side, option investors may be able to find more opportunities for generating profits due to increased liquidity in the market. For example, high option volumes may present investors with the chance to buy a large number of options at a more advantageous price.
On the other hand, high option volumes can be risky for investors. When option volumes are particularly high, investors may struggle to find the right strike price and expiration date for their options. It is also difficult to time the market, as option prices may be volatile due to large volumes. Additionally, a sudden volume spike can reverse quickly, so check whether it reflects opening or closing trades by watching open interest the next day.
MarketXLS and Options Trading
MarketXLS is an Excel add-in that returns options data in cells, including =TopOptionsByVolume("SPY") for the most active contracts and =TopOptionsByOpenInterest("SPY") for the contracts with the most open interest, plus data on call options, put options, option strikes and option expiration for SPY SPDR S&P 500 Trust ETF (SPY), and other stocks. They have extensive resources to help those new to options trading, such as Options Trading for Beginners, providing investors with everything they need to help them make the best decisions.
Options data is end-of-day on the MarketXLS Standard plan and real-time on the Advanced and Business plans.
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