Hi Larry,

When buying a call or a put, should one look at the value of the open interest and does the value of the open interest effect your decision at which strike price you choose to buy the option at?

In one of your previous articles you mentioned the NEM JAN 05 LEAP 20 options were thinly traded, what do you mean by this? Were you looking at the open interest?

Maggie

Maggie,

Yes, when I refer to an option as thinly traded, I'm referring to the lack of open interest and volume. It becomes a factor when you consider transaction costs.

For example, an option that is thinly traded may have a spread between the bid and the ask price of 30 or 40 cents or more. But a very actively traded option, like QQQ for example, in the front months and close to the strike price, may have a spread between the bid and ask of only 5 or 10 cents.

If you are buying LEAPS, it's not a real problem because you expect to hold on to the option for quite some time. However, if you were actively trading the option then it would become more of an important factor.

Larry