Potential Liquidity Trap w/ Options

Discussion in 'Trading' started by BobbyMurcerFan, Aug 24, 2002.

  1. What if this happens:

    You buy a liquid option, let's say an at-the-money IBM 80 call.

    The market keeps going up to 120. You now own what I imagine is a pretty illiquid option (b/c very few people buy calls w/ 40 points of intrinsic value).

    So are you confronted with only low bids if you try to sell your call?

    On the other hand, if you decided to exercise, don't you need enough equity in your account to buy IBM at 80, eventhough you plan to immediately re-sell the shares at the market?

    Thanks for your help.
  2. I think you would just exercise and your broker would take you out at market...good question.
  3. Pabst


    No matter how illiquid, if you are willing to give up an edge, there is an out. If "fair value" is $40.00 then perhaps the best bid will be $39.80. I have found over the years that if I'm willing to put between a nickel or dime, "locked", into a MM's pocket, they are happy to take it.
  4. I guarantee you that I will personally buy any option from you for its exact intrinsic value up to 3 days before its expiration. Does this solve your problem?
  5. If you ever really have that problem and your broker won't oblige you; email me about it, post them on ISE at parity, and I will take you out.

    And, if you don't want to go through all that trouble, post them a tick below parity and I will still take you out.
  6. After reading the post previous to mine, up to five minutes before the close on expiration day.
  7. Sounds like we've got our own ECN here. :) Thanks for the answers.
  8. nugya


    I think everybody confirmed your statement above. You will able to sell it by giving up some of your profit.
  9. Not exactly, I believe he was referring to giving up significant edge, multiple ticks below parity or else he would not be exercising; thereby giving up any time value remaining.