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Welcome to your source for answers to questions about option concepts, strategies, and terminology. A new question and answer is published each week. To view the Ask the Institute archives, click the "Ask the Institute Archive" link below.

Please note, questions WILL NOT be personally answered and may not be chosen for publication on the web site.

View the archive of all "Ask the Institute" questions.

 

This week's question:

DATE: October 24, 2014

QUESTION:

Can you explain what is meant when someone states, "The options on that stock are not very liquid."

ANSWER:
The term "liquid," more commonly stated as "liquidity," refers to the level of difficulty - or cost - involved when entering or exiting a position in a stock or an option. Liquidity has three components: 1. the width of the bid-ask spread; 2. the size of the market; and 3. the frequency at which trades occur. To learn more about the concept of liquidity, view this segment of "Ask the Institute."

CBOE Volatility Index (VIX)