Why is it risky to trade in illiquid contracts?
The opportunity to buy options cheaply often attracts traders to look at far-out-of-the-money options contracts which require drastic movement in the underlying for the position to generate a reasonable profit. Similarly, deep-in-the-money contracts may face a liquidity shortage. A lack of liquidity implies a high bid-ask spread which can result in order execution at a price far from the last traded price. Hence, traders may not be able to exit at the desired price, making them risky to trade in.
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