The relationship between index option moneyness and relative liquidity

Previous research has implicitly assumed, or even suggested, that the relationship between option moneyness and liquidity is quadratic with liquidity maximized for at‐the‐money options. This study investigated the nature of the relationship between moneyness and three liquidity proxies for options on the Standard & Poor’s (S&P) 100 and S&P 500 indexes. With bid – ask spreads, volume and time between quotes as liquidity proxies, statistical analysis rejected the hypothesis of a simple quadratic relationship between moneyness and liquidity in these markets. Although liquidity was maximized near the money, liquidity did not decrease symmetrically as option strikes moved deeper in the money or deeper out of the money. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:971–987, 2000