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A. Götz, R. Riordan, P. Schuster, and M. Uhrig-Homburg: Measuring Option Liquidity

May 8, 2025

We introduce the Elasticity-Adjusted Spread (EAS), the quoted bid-ask spread divided by the dollar value of its delta hedge, as a measure of option liquidity. Using U.S. equity-option intraday trade data from 2004-2021, EAS flags the 2008-09 and 2020 crises, ranks at-the-money and in-the-money contracts as most liquid, and remains stable to moneyness shifts. EAS is more strongly correlated with underlying liquidity, underlying market capitalization, and VIX than the best existing option metric. A low-frequency proxy based on daily data preserves these properties, making it a broadly useful, simple, and theory-consistent benchmark for academics and practitioners.

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