Ep56 - Wait. WHAT About Alice?

Dan is joined by returning guest John Kmiecik to unpack the real-world consequences of trading illiquid options (wide bid/ask spreads, low volume/open interest and “roach motel” trades you can’t exit efficiently). They also discuss how expanding strike/expiration listings can fragment liquidity, even in big names, and when a “one-sided” wheel trade can justify holding through expiration.

Key Topics

• What liquidity is and why it’s central to wheel trading execution
• The “roach motel” problem: easy to enter, painful to exit
• First-pass liquidity checks: bid/ask spread as the quickest warning sign
• Supporting clues: volume and open interest (and why they usually align with spreads)
• The risk of trading unknown tickers with wide spreads
• Position sizing vs. liquidity: why 1,000-share covered calls can be hard to unwind in thin names
• Liquidity fragmentation from more strikes/expirations (including M/W/F listings)
• Surprising pockets of illiquidity even in large underlyings depending on expiration
• Earnings timing and why certain expirations may be missing or avoided
• When illiquid wheel trades can still work: entering with a plan to hold to expiration

Key Takeaways

• Bid/ask spread is the “tell.” If it’s wide, you don’t need more proof; execution costs are already embedded in that market.
• Illiquidity turns profits into mirages. You can be “right” on paper and still struggle to exit near breakeven because the spread eats the edge.
• Volume/open interest matter, but spreads matter more. Low OI/volume often explains wide markets; the spread is the final summary metric.
• Size must match the option market. The bigger your position (e.g., 10-lot calls), the more liquidity becomes non-negotiable.
• More expirations can mean worse trading. Adding strikes and expirations can dilute order flow, widening markets even in otherwise liquid names.
• Not all expirations are created equal. Liquidity can vary dramatically across adjacent expirations; always check the specific chain you plan to trade.
• One-sided wheel trades offer an escape hatch. If you can enter at a price that meets your plan and intend to hold to expiration, liquidity on the exit may be irrelevant.
• Your trading plan decides the tolerance. If rolling/active management is required, illiquidity is a bigger threat; if “hold to expiry” is acceptable, you have more flexibility.

Connect

• Learn more about host Dan Passarelli and Market Taker Mentoring: MarketTaker.com
• Get exclusive content including video trade walk-throughs, Dan's actual trades, monthly AMA webinars and more: wealthbuildingpodcast.com
• Subscribe on your preferred platform and leave a review to help more traders discover the show.

Disclosure:

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, investors must read Characteristics and Risks of Standardized Options (ODD) which can be found at https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document

Don’t trade with money you are not prepared to lose. Anything discussed on this show is intended to be generalized information and not intended to be a recommendation to buy or sell any security. The host and guests are not familiar with listeners’ specific situations. For trading information relevant to your specific needs, speak with a licensed broker or advisor.

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