An illiquid option is a contract for which there is no secondary market, i.e., it is not tradable on an OTC or exchange. Illiquidity results mainly from absence or lack of standardization. An illiquid option is rarely quoted in the interbank broker market, making it harder to hedge than a standardized option. The cost of a hedge will determine how an illiquid option will be priced. Notwithstanding, there are some standardized products that are illiquid. An embedded equity option is a standardized contract, but for which there are no price quotes in the market.
The following table provides a comparison between illiquid options and standardized options:
| Illiquid Option | Standardized Option |
| It is not quoted in on an exchange | It is quoted on an exchange for benchmark maturities |
| It is not quoted in the interbank broker market | It is quoted on the interbank broker market for nonbenchmark maturities |
| Its maturity is more than two years | Its maturity is less than two years |
| Maturity depends on which equity index is being quoted | Maturity depends on which equity index is being quoted |
| It is priced based mainly on the hedges | It is priced based mainly on supply and demand |
