There is no problem with such cheap options, because many option traders just trade the option itself, they are not interessted in exercising the options. As long as the commission is not high such cheap options can make exorbitant profits.
Many option sellers don't know this fact: you can close a position earlier than the expiration date by simply buying the same options... Did you know that?
Geez, I would hope options sellers would realize that . Maybe the guy in this example got caught in a big move and hoped for a reversal that didn't come. JJacksET4
THIS IS THE BEST EXPLANATION FOR THIS MOVE THAT I HAVE GOTTEN IN 28 POSTS. THE FACT THAT YOU SOLD THE OPTION EARLIER NEVER OCURRED TO ME. THANK YOU SOO MUCH FOR THAT SIMPLE EXPLANATION. THAT MAKES VERY GOOD SENSE NOW AND I WILL TRY THIS MYSELF.
Why is it bad selling them for a nickel? Often times, the market fall needed for these options to even end up close to the money is just not possible, well historically and statistically. But clearly thousands of these are bought and sold everyday so they appear to be priced at the fair value.
MegaDeth, Here's why it is wrong to sell at a nickle: Many years ago people thought this way and lots of early options traders did this regularly for a long time thinking that is was easy money. However, and I forget the exact details, but I think it was a copper producer (Kinnicott?? correct me on the name/spelling please) involved, but many people wrote the calls far out of the money found themselves in deep trouble because on the Friday of expiry, suddenly a friendly takeover bid was announced for a price about 60 % or so higher than the closing price for the day. Of course, the options were exercised! Then the call writers, who received only about $7 (they were traded in 1/16's then) net for each call, suddenly had to deliver shares that were worth many dollars. In order to do this, they had to ante up about $30 for each share!! That's $3000 for each call. You can imagine what selling 100 or a thousand calls would do. Needless to say, many lost their shirts, cars, boats and houses! That's why 0.05 options are OK to buy, but not worth it to sell. You gain so little, but risk a lot. Yes the probability of failure is small, but it is not zero. The other reason that selling 0.05's is no good is that it ties up margin to make very small returns. I write options regularly in various spread situations. I try to get about $2.00 for each spread, and I'm quite happy to buy them back for a few cents, usually about 0.20 or 0.25, and then write the next month's options. Waiting for the options to expire in order to capture 0.05 means that the next month is declining in value faster than the front month-- ie. I'm losing out!
I understand the premise of your message but in this specific instance I am asking about a broad-based index like the SPX. The index cannot rally/drop 40%+ in a month, and by that I really mean that it has not happened so far. Would you contend that such a drop, although not happened yet historically, is still likely and when it does happen it wipes out all gains accrued over the months/years?
A blast from the past. Kennecott Copper! I must have written covered calls on that one 30 years ago.. and I'm only 36 years old now
If instead of a cash settled index, one uses, say, SPY (appropriately multiplied) then one can view the selling of DOTM puts (when sold in size appropriate to the account) as buying 'market bonds.' Further, it seems not unreasonable that the counterparty to the SPY put seller might decide to hedge by purchasing SPX puts. Perhaps this is an additional explanation for those FOTM SPX put purchases.