Who sells .01 contracts !!! ???

Discussion in 'Options' started by IndyJonerJr, Jan 18, 2018.

  1. Hi guys.

    Maybe I’m slow. But I still can’t see the reasoning whenever I see .01 contracts out there. I can see from the buyers side. As that is very attractive bet although usually a lightning strike bet..

    I can’t see why anyone would accept the risk. And there is nothing to gain after commissions / margin / taxes. I can’t see any point, as it’s a losing bet from my calculation when the point is to make premium selling options.

    Can someone clue me in please, as I guess I’m just thinking too hard on this as it’s been on my mind since I started selling options a year ago and made the mistake of picking up some of these thinking it was free lunch.
  2. People taking rebates and delta hedging, maybe?
  3. kurros


    I don’t know how everything about counterparty firms works... hopefully someone can chime in with some insight. One thing to consider though is that you might be buying to close but the other side could be selling to close.
  4. Sure. I guess maybe they are selling to close a losing bet to get out to be free to enter another trade???

    Beer. Would be happy to hear an explanation of delta hedging if you like to explain. I’m all new. I usually just sell puts with about 25% calls as I find I’m better at guessing price drops, then rocket highs..

    I guess can’t see anything from my view to take all that trouble...

    lowest I would do is a .03 on a Friday weeklie with a couple hours pretty far out. And that’s only if I have extra margin. I play it tight as I keep pushing contracts everyday to Friday to at least get back margin fee costs or if I wanna buy something and to fund it..
  5. Search the term "cabinet bid". Depends on the venue.
    beerntrading likes this.
  6. Delta is the number of shares you need to hold to collect just the option extrinsic premium (no price change based on moves in the underlying, in a perfectly efficient, never closed market)...It's also the amount of change you expect to see in the price of the option based on the change of the underlying (for the calculus literate, this is where the term "derivative" comes from). But in penny options there's almost no hedging unless there's a big move against you.

    Also where a retail trader probably losses money to take this trade, someone with low transaction costs and rebates can take a penny and fraction of a penny to take your order...they sell it for .014 for example, while you would collect .002 to sell it retail. In aggregate, taking 7-fold your transaction is huge...in the rare times the market makes a big move against them, they take a "big" loss in transaction costs as their delta (the number of shares they must hold/short to offset intrinsic value) goes quickly from 0.00 to 1.00 as they must pick up the shares to hedge.
  7. Just searched that, and thanks for the info, it's new to me. But almost no volume in "worthless" options is speculative. It's dominated by market makers taking rebates to fill your position.

    Remember, statistically speaking, and in aggregate, a buy at the bid is a winner as is a sell at the ask. The spread and transaction costs are what make the difference here.

    There are also firms that "offer" this liquidity in the hopes of taking someone's attempt to recoup pennies that they can exercise ATH of news drops. In theory, it's profitable of you make liquidity and not take it.
  8. Market makers and some firms don't pay commissions on a per trade basis. They pay in other ways that they wouldn't pay anything individually on the trade. It may be attractive to them as they devour every 1c all the time and once in a while pay out the losses.

    There are also always people like the previous you who thought it was a free lunch too.
    cdcaveman likes this.
  9. JackRab


    I'd sell the 100 put in SPX for a cent... depending on fees etc.

    I would sell you any option for a cent if I can buy another option to hedge it in a way for me to have zero risk... or if together with the hedge it makes a really decent risk/reward.
    iprome likes this.
  10. JackRab


    You can't delta hedge an option that's trading for 1 cent.. unless it's on a 50 cent stock, it has virtually no delta.... the only way to hedge selling 1 cent options is by buying other options in a way that gives you a credit and a risk/reward that's not totally idiotically skewed to having very little reward for big risk.

    So for you to be able to sell something like this, you need to be nett delta short when the stock would crash through the strike...
    #10     Jan 19, 2018