Exercise Long term ITM Options?

Discussion in 'Options' started by kroponer, Jun 13, 2009.

  1. kroponer



    Say that you purchase long term ITM options as a leg in a strategy.

    I.e., today you would buy

    SPX DEC2010 900.00 strike Call (cost 138.75)

    Wishful thinking, SPX climbs to 1,100 by December next year, and you held your ITM call this whole time.

    At 1,100 on the SPX, 900 strike Calls will not see ANY volume I assume.

    Therefore, my question is, to close a Far ITM position do you have to exercise the option, considering there is no volume at that level? Or will a market maker buy it if you lower the ask to mark/below mark?

    Just another example, last year on 6/12/2008:

    SPX JUN 2009 1350.00 PUT was at mark 116.10. Now, being the front month, and because the SPX has dropped precipitously since then, it is currently marked at 405.20.

    There is 7,747 Open Interest, and expiration is next Friday, what do those put buyers(sellers?) plan to do?
  2. The SPX is a cash settled Euro style option so you cant exercise it early.

    They either have the choice to close out the position in the market place or let them exprire and get/give the difference in the strike price and the Friday morning opening settlement price.

    The closing mark is not a big deal, and there is always a bid/offer which you can trade on even if there is no volume in that series for the day. You may not like the width of the bid/offer spread in that series but the market makers have no choice but to make you a bid and offer.

    You also dont know what they may have vs. those deep puts, I would doubt many of them just bought or shorted those puts and rode them all the way.
  3. kroponer


    Thanks for clearing that up xflat! Cash settled is cool.
  4. Cash settled is cool so long as its european exercise. Its a bitch when they're American because you can nicely hedged position and wake up the next morning find out you had an assigment and your net delta is totally different.