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Liquidity
Options strategies must be applied in specific market conditions to be money-makers. Liquidity is one of these market conditions. Liquidity is the ease with which a market can be traded. A plentiful number of buyers and sellers boosts the volume of trading producing a liquid market. Liquidity allows traders to get their orders filled easily as well as to quickly exit a position.
The best way to discover which markets have liquidity is to actually visit an exchange. The pits where you see absolute chaos are markets with liquidity. As long as there are plenty of floor traders screaming and yelling out orders as if their lives depended on it, you will probably have no problem getting in and out of a trade. However, I tend to avoid the pits where the floor traders are falling asleep as they read the newspapers. These are obviously illiquid markets and it would not be a wise move to place an options-based trade there.
If you don't have the ability to actually visit an exchange, you can still check out the liquidity of a market by reviewing the market's volume to see how many shares have been bought and sold in one day. As a rule of thumb, I choose markets that trade at least 300,000 shares a day, although one million shares a day is even better. It is also vital to ascertain whether or not trading volume is increasing or decreasing. This kind of volume movement is studied to indicate turning points in market price action. You can also monitor liquidity by monitoring the buying and selling of block trades-orders of 5,000 shares at a time-by institutional traders.
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