Trading Illiquid Options Using IV as Reference

During earnings season or event-heavy periods, options traders often face the challenge of dealing with illiquid contracts, those with no bid/ask, no LTP (last traded price), no open interest, and no volume.

To help advanced traders navigate these gaps, AlgoTest's Strategy Builder now allows order placement in illiquid options using IV (Implied Volatility) as a reference point.

⚠️ This feature is intended for experienced traders only. Beginners, proceed with caution.

What’s the Problem with Illiquid Options?

Illiquid options often:

• Have no bid or ask
• Show no last traded price (LTP)
• Have zero open interest (OI) and zero volume

Yet, you may still want to trade them if:

• You're anticipating a volatility spike (e.g., earnings announcement)
• You're building a custom spread or hedging far OTM risk

But without price discovery, placing orders becomes guesswork.

The AlgoTest’s Solution

AlgoTest now lets you estimate a theoretical option price using IV as a reference, so you can:

• Evaluate a fair value for illiquid strikes
• Place limit orders on contracts with no quotes
• Build complex structures with confidence

This estimation uses:

• The symbol’s ATM IV
• Strike moneyness
• Time to expiry
• A pricing model (e.g., Black-Scholes)

You get a starting reference price based on current implied volatility, even if the strike has no market depth.

How to Use It

1. Open Strategy Builder
2. Select your symbol and expiry
3. Add a leg for a strike with no bid/ask
4. Enable "Use IV to estimate price" toggle (UI label may vary)
5. AlgoTest will compute a reference price using the IV curve
6. You can adjust and submit a limit order using this price

The platform will not place market orders for such illiquid options to protect you from bad fills.

Important Notes

• The computed price is indicative, not a live quote.
• This tool works best when IV surfaces are relatively stable.
• Always verify estimated prices and use conservative position sizing.

Example Use Case

You’re preparing for earnings and want to:

• Sell a far OTM call with no live quotes
• IV is elevated and you expect it to crush post-event
• You toggle IV-based pricing
• AlgoTest calculates a fair value of ₹5.30
• You place a limit order at ₹5.30

This allows you to act with more confidence, despite zero liquidity on the screen.

---

Who Should Use This?

Experience Level	Recommended?
Beginner	Not recommended
Intermediate	Use small quantities only
Advanced	Fully supported

This is an advanced tool meant for traders who understand:

• IV surfaces
• Model-based pricing
• Risk in illiquid instruments

Feedback

We built this feature for advanced traders who operate during earnings and event-driven trades.

Share feedback: support@algotest.in
Join the discussion: Telegram Community