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    Thread: illiquid Option what is the advantages and disadvantages of purchasing it?

    1. #1
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      Default illiquid Option what is the advantages and disadvantages of purchasing it?

      Illiquid option is a contract that cannot be easily sold or converted to cash quickly at the prevailing market price.can you describe the advantages and disadvantages when we purchase it?


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      Default Re: illiquid Option what is the advantages and disadvantages of purchasing it?

      Illiquid Option: It refers to the contract which is not easily sold or converted to cash quickly at the prevailing market price. As we know liquidity is all about how quickly we sell or buy an asset or contract. Like some long-dated options remain very tough if the trader has them in the portfolio as these options are not quickly saleable and when the trader wishes to sale them it takes time and sometimes it takes weeks to offload such contracts.

      Like when a trader has such contract and he needs money immediately to invest on some else asset where he is seeing more potential of profits he remains fail to convert such contracts/options into cash that are illiquid. If the option you are interested in gas low open interest, there is nothing you can do apart from hitting the bid or lift the offer. The market maker is showing his indifference at the wide price. In my options trades, I'd always considered the premium to be my stop loss.


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      Default Re: illiquid Option what is the advantages and disadvantages of purchasing it?

      Illiquid option describes an asset or security that cannot be sold quickly due to a shortage of interested buyers or lack of an established trading market. Illiquid assets cannot be easily converted into cash without potential for losing a significant percentage of their value. Examples of illiquid assets are, penny stocks, microcap stocks and nanocap stocks.

      Advantages of Illiquid option

      Illiquid assets despite it is difficult to sell, it's main advantage is that it does not easily depreciate over a period of time. Illiquid option assets creates low spreads between the seller's asking price and the buyer's offer price, as there are only very few investor's biding for it. So this makes it easy for investors to agree on a fair market value.

      Disadvantages of Illiquid option

      Illiquid option assets cannot easily be converted into cash as they cannot be sold quickly. They are considered more risky than liquid assets. During periods of market volatility, when there are fewer buyers than sellers , illiquid assets become note difficult to sell. A seller may find no willing buyers. Holders of Illiquid assets may be required to discount their asking price to attract potential buyers, and in worst scenario the illiquid will have zero value at certain point in time.


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      Default Re: illiquid Option what is the advantages and disadvantages of purchasing it?

      The state of the bank that is unable to fulfill the obligations that are due. Assets that are not easily sold in cash, for example loans on the secondary market are limited; however, loans like this can be sold at a discount and nominal price, including in this sense are assets that are not calculated into bank capital, as well as real estate obtained by payment of advances and securities that cannot be traded.

      A savings account that does not show an active mutation, except the recording of interest income for a certain period of time. Financial companies that do not have enough funds to fulfill obligations that have matured.


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      Default Re: illiquid Option what is the advantages and disadvantages of purchasing it?

      Quote Originally Posted by chiko     
      Illiquid option is a contract that cannot be easily sold or converted to cash quickly at the prevailing market price.
      can you describe the advantages and disadvantages when we purchase it?
      Illiquid Option Advantages Are :
      1- Illiquid Option Is Less Volatile Than Liquid Option .
      2- The Value Of Illiquid Option Is Likely To Stay More Stable Overtime .
      3- Illiquid Option Is Lower Correlation with The Broader Stock Market .
      4- Illiquid Option Investments are Very Important For Diversification Due To Their Lower Beta Because Their Pricing Is Not Update On A Regularly Basis Like Publicly Traded Options .

      Illiquid Option Disadvantages Are :
      1- It Can't Be Easily Sold Or Converted To Cash Quickly .
      2- Stale Pricing Because its Costs May Rely On Old Costs .
      3- Their Bid-Ask Spread Are Much Wider Because Their Low Liquidity .
      4- It May Have Very Low Or No Open Interest .


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      Default Re: illiquid Option what is the advantages and disadvantages of purchasing it?

      Illiquid options is define as the process of trade where you can't buy or sell a product easy due to its very lower of price and higher of the volume of the product. Illiquid options is revers to the liquidity of the market. The advantage and disadvantage of illiquid options are bellow:-

      Advantages:
      1. The stability of illiquid options are higher than liquidity.
      2. Price is not changed time to time as a result sustainability is more and traders can trade confidently.
      3. It has more security than liquidity.

      Disadvantage:-
      1. Very low level of liquidity.
      2. Not possible to sale easily, as a result you can't converted your goods to cash.
      3. Not possible to gate expected price at the time of sales.


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      Default Re: illiquid Option what is the advantages and disadvantages of purchasing it?

      First we first need to understand the meaning of liquidity, Liquidity is the degree to which an asset can be quickly purchased or sold on the market so the illiquidity is the an asset or security that cannot be sold quickly due to a shortage of interested buyers or a lack of an established trading market.
      an illiquid are asset that if its bought by an investor its very difficult to find a buyer in case the owner wanna sell it back.

      Advantage

      These assets are tend to be less volatile, this means that their values are likely to remain more stable over time, since their pricing is not updated, or marked to market, on a regular basis like publicly traded securities.

      disadvantage

      Due to high minimum investment size requirements and legal restrictions pertaining to who can participate, it may be difficult, for an individual who is not exceedingly wealthy to invest in an illiquid stock


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      Default Re: illiquid Option what is the advantages and disadvantages of purchasing it?

      Illiquid option : an agreement that gives the option buyer the right to buy or sell contract in the future at a specific price and at or before a certain time (expiration date). In the foreign exchange market, illiquid option transactions can be interpreted as a financial instrument that gives the holder the right to buy or sell a particular currency in certain amount at a certain time in the future or at predetermined exchange rate (usually has been determined when the transaction was made).

      Advantages :
      ~ Fixed trading costs.
      ~ Futures are very good for trading certain investments.
      ~ There is no decay in time.
      ~ Prices are easier to understand.

      Disadvantages :
      ~ There is not much liquidity.
      ~ Movement is too slow even though it belongs to the safe category.
      ~ Sometimes the open price is not as you wish.


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      Default Re: illiquid Option what is the advantages and disadvantages of purchasing it?

      Pros and Cons of Illiquid Options

      Pros:

      - Safe, especially if used as savings.

      - No need to fear the price volatility that is too large.

      - Risk is very small, especially if we cannot always monitor the price movements of these assets.

      Cons:

      - From an investment perspective, the scheme of illiquid assets is safe, but the volatility that occurs is very small, so the profits will be smaller.

      - In addition, if liquidity really becomes "non-existent" then the position must be closed without clear certainty.

      - It is difficult to diversify illiquid assets, because calculations become more difficult.

      - Exposure often occurs unnaturally.

      - There are very few types of options.


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      Default

      Illiquid option has to do with security or an asset that cannot be sold easily at the prevailing market price due to lack of liquidity. This is not a common type of option but it has it's own advantages and disadvantages.
      The advantages are;
      a. It does not easily depreciate which makes it reasonable for one to hold it and wait for the opportunity to sell
      b.It has very low spread
      The disadvantages are;
      a. It cannot be sold easily and quickly and it can be discouraging when the potential seller is in need of cash
      b. In some case the seller may be forced into giving a discount to the buyer to succeed in selling it quickly


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