Is it something I'm missing here or are the bid prices in the following picture lower than their intrinsic value? Spot (underlier) price: 6. Intrinsic value for call: (spot - strike) = 6 - 5 = 1, call bid = 0.9 (lower than intrinsic!) Intrinsic value for put: (strike - spot) = 7.5 - 6 = 1.5, put bid = 1.1 (lower than intrinsic!) Isn't an option price supposed to be always higher than the intrinsic value?
Yes, bid prices are lower then intrinsic. Why does that seem strange? It looks like the 5 calls are worth about intrinsic value, so the MM's are quoting around .10 of edge to make the trade, .10 below intrinsic to buy and .15 over to sell. It is likely the "real' market is tighter, probably .05 below and .05 above. Same theory with the in the money puts.
So the problem is then the "strike increment" or whatever it's called. It's absurd to have 2.5 increment for a stock that trades at $6, essentially 50% of stock value. Wtf, who came up with such stupid rules?
You're buying on the offer, not on the bid. So for the call it's 1.15, and the put 1.65. Both are higher price than the intrinsic value.
Ok, I got it. Was used to SPX, but strike increment so big for penny stock options is absurd, makes them untrade-able.
Quite interesting. I sort of "heard" that trading options on penny stocks presents some problems but since I haven't really focused on it, didn't knew what those were. So in summary: 1) The absurd "strike increment" which makes options untradeable unless the stock randomly happens to be near a listed strike. 2) Fixing problem #1 by making smaller strike increments for penny stocks reveals a second problem, low liquidity. Still, I'm not convinced #2 isn't a consequence of #1. If presented with the opportunity to price options relevantly, perhaps market makers would offer more liquidity than we have today. I mean, you just can't price an option that's 50% away from spot price within an expiry of a month. In the picture attached, unless the stock price nears $5 or $7.5, there practically doesn't exist an option market for it. To me this is the sort of stuff that would benefit from innovation / alternative offerings (like an OTC exhange?), instead of the lunatic "fair put" type of discussions that are trolling around.
Options on penny's, oh lawd. Hmm, would it be possible for the premium of an option on a penny stock to be worth more than the underlying?
Well there's pennies and pennies. Some have a market cap of a couple of millions, others (like) this one, nearing 100 billions. I would expect to be able to trade options on an underlier that's worth $100B in the market.