Exiting a naked put position with no market

Discussion in 'Options' started by perisa, Jan 31, 2011.

  1. perisa


    I'm wondering how this works.
    I've sold naked puts (stock option) that expire in a year. The stock price has moved to where there is no bid on the option. How do I exit now?
    in all likelihood, the position will expire worthless in a year, but I want to get out to avoid any risk.

    Is there a standard practice for this situation, like buying the same strike price but with an expiration further out? If so, does that count as covering my short as far as cash and margin requirements are concerned?

  2. FSU


    If you sold the put, you need to buy it back, so you don't care if there is no bid. You are interested in what the offer is.
  3. perisa


    Yes, you are right. I got mixed up... so what happens if there is no offer?
  4. If this is a US listed securities market your broker can enter what is called a cabinet trade. As the previous poster mentioned you should be looking at the ask, however if there is really no bid and no ask - or a zero bid and a zero ask which is extremely rare a Cabinet Trade would take your entire position and open interest off the OCC books. Cabinets are done for a $1.00 for the entire position. Not a dollar a contract - just a dollar.
    I suspect with time left the market is probably more like zero bid and a tick or two ask.
  5. 1) With "cabinet" trades, I believe it can only be an offsetting transaction, not an initiating transaction, to qualify for that type of execution.
    2) Place a bid in the market for "one tick". Hopefully, you'll get filled. If not, raise it to "two ticks".
    3) Your risk/reward is no good anymore when you have no additional reward potential on a short-option that has lost nearly all of its value. :cool:
  6. In can only be closing, but he has open interest so it is closing. There does not need to be a offer and of course there is no bid or a cabinet would be silly.
  7. You do not need to have a quote.

    Just put in a limit order good-till-cancelled to buy it back at whatever the current value is (shown on your broker statements) plus if need be a small amount, and usually it will be filled.
  8. yeah exactly, you guys making this too complicated. If it's a standard us stock as underlying, just because there is no print on your screen doesnt mean there isnt a market. You look at the bid/ask on the strike ladder where there are prints, and determine fair price you willing to buy back at for your otm short, place a limit order, depends on your time frame, if it doesnt fill, increase the limit price, it will be hit as long as the price is reasonable, if it's really illiquid, you will have to pay a big spread for it, you can determine that by looking the bid/ask spread of atm strikes.
  9. Atheist


    Is it allow under the law that I put in a low bid and then buy it back from a second account? Assuming no one was interest.