I'm reading a book by Lawrence McMillan titled "Options as a strategic investment " So far, I'm on a 2nd chapter and the info appears to be a bit above my paygrade. Are options something that only the pros usually deal with? It appears that buying and selling a stock is not as confusing as buying or selling an option. In other words, if the market for options is not as big as a market for stocks, how can I be assured that there will be a buyer to buy my option?
Market makers take the other side, if there's noone else willing to take the other side. This means that you may have to pay the full bid/ask spread, but you will be able to get out. Options are a lot more complicated than stocks, so take the time to educate yourself properly, if you do decide to trade them.
It's sorta like chess versus checkers If you can trade stocks successfully, don't bother with options.
Hull's Options, Futures & Other Derivatives and Natenberg's Option Pricing and Volatility are considered the handbooks on the street.
You can't. During the last tading day, buyers for many OTM contracts just simply disppears because the options become worthless. It is true that MMs have both obligation and incentive to make a market. It is the competition itself that make the bid/ask spread narrow as it is today. It is called stork market or options market for a reason.
It is commonplace for an option to go no-bid if it is well out of the money a week or two before expiration. I have some Nov MSFT 20 puts for sale real cheap -- 0.01. (They were the long side of a MSFT 20/22 credit put spread, and I've already bought back the 22 puts for a penny.) There are about 1000 identical put options for sale at that strike and expiration, all for a penny. Nobody's buying because nobody thinks there's a decent chance that MSFT will be below 20 on Friday. So if you buy an option there's no guarantee that you'll be able to sell it later. For an American option you can, any time up until expiration, always get at least the intrinsic value by, if necessary, buying/shorting the underlying and exercising the option.
Two traders on the floor: #1) Hi, I'd like to buy that worthless OTM call for zero. Would you sell it to me for zero? #2) Sorry, I disppeared!