Liquidity in derivatives trading

Here’s a brief about the concept of liquidity and why you should give importance to it if you are trading derivatives.

Firstly liquidity is the a measure of assessing if there are enough buyers and sellers available in the market.

Higher liquidity means that there are enough buyers and sellers and vice-versa for lower liquidity.

Higher liquidity leads to tighter spreads and facilitates easy trading and you will enough buyers and sellers to trade with.

Lesser liquidity leads to wider spreads and makes it difficult for the trades to enter and exit as there aren’t enough buyers and sellers which will result in wider spreads.

Tight spreads means lesser difference between the bid/ask and wider spread means greater difference between bid/ask.

As a derivatives trader it is crucial that you chose the instruments which are highly liquid so that you can make your entries and exits without any risk of not finding buyer/seller because there are couple of derivative instruments in indian market which are not so liquid especially in the stock options space, so chose the instruments based on the liquidity.