Deep in the money puts on SPY

DChan · Nov 29, 2016

Hi All,

I am a noob in option trading, hoping someone can give me some insights into the risk of this trade.

I sell SPY161216P00315000 for 107.33 and buy SPY161216P00310000 at 91?
It is highly unlikely that the price of SPY will be above 310 by Dec 16th.

SPY Last Price = 220.91

Strike Last Chg Bid Ask Vol OI
SPY161216P00310000 310.0 90.95 0.0000000 88.14 91.00 75 1116
SPY161216P00315000 315.0 107.36 0.0000000 107.33 107.72 5 11584

JackRab · Nov 29, 2016

Those prices are not up to date... where did you get your data?

There's only intrinsic value left so the value for the 310 put would be 89.09 and for the 315 put 94.09. That spread is worth $5 and will never have been more than that... not yesterday, not now and not tomorrow... because no-one in their right mind would bid >5 for a $5 put spread.

So, basically if you could do this trade, sell the 310-315 put spread for $16.33 there would be no risk just $11.33 rewards... but that's not going to happen unfortunately...

EDIT... Right, Yahoo... fuck man, why do people bother looking at Yahoo prices? It's like looking at a Ferrari brochure from with prices from 1979 at the local shoe shop...

Stymie · Nov 30, 2016

When you start looking at deep ITM options, the liquidity dries up and the market makers will take you to the cleaners. The best way to assess their value is to look at the corresponding OTM option which has more volume and tighter spreads and that should give you the extrinsic where they can trade. I say can but the market makers wont let you get a good deal and they will front run you as the rules allow. The computer algos also monitor the market and will spread trade you if you put in the wrong price in addition to locking in any risk free trade that is offered outside intrinsic so above comments are correct as well.
Then you have the cost of putting on the trade and the exercise cost of two strikes ($30) if you put the trade on and let it expire ITM.... transaction costs would just add to your losses.

JackRab · Nov 30, 2016

Stymie said:
When you start looking at deep ITM options, the liquidity dries up and the market makers will take you to the cleaners. The best way to assess their value is to look at the corresponding OTM option which has more volume and tighter spreads and that should give you the extrinsic where they can trade. I say can but the market makers wont let you get a good deal and they will front run you as the rules allow. The computer algos also monitor the market and will spread trade you if you put in the wrong price in addition to locking in any risk free trade that is offered outside intrinsic so above comments are correct as well.
Then you have the cost of putting on the trade and the exercise cost of two strikes ($30) if you put the trade on and let it expire ITM.... transaction costs would just add to your losses.

No not true... the only way MM might take advantage is because they can maintain a wider spread in ITM options. For deep ITM, when there's no more time value left, you can trade very near intrinsic value... MM's still compete with each other and a few cents is easy money.

That's not really taking someone to the cleaner IMO. They won't take dollars of you per option, unless you're an idiot and buy/sell at the bid/ask instead of at intrinsic value.

That said... why would you want to trade deep ITM. Even if you want to close out a position, it might be easier/cheaper to hedge with underlying and exercise (less spread to cross), so you're right on that.

DChan · Nov 30, 2016

I see, thanks for all your responses. I figured there are no free lunches. I was worried about the liquidity issue, and the risk of early exercise even assuming the quote was correct. For now, I'll stick with OTM and ATM option analysis.

ironchef · Dec 1, 2016

Stymie said:
When you start looking at deep ITM options, the liquidity dries up and the market makers will take you to the cleaners. The best way to assess their value is to look at the corresponding OTM option which has more volume and tighter spreads and that should give you the extrinsic where they can trade. I say can but the market makers wont let you get a good deal and they will front run you as the rules allow. The computer algos also monitor the market and will spread trade you if you put in the wrong price in addition to locking in any risk free trade that is offered outside intrinsic so above comments are correct as well.
Then you have the cost of putting on the trade and the exercise cost of two strikes ($30) if you put the trade on and let it expire ITM.... transaction costs would just add to your losses.

My personal experience:

Actually due to appreciations, I owned some DITM calls at times, to exit, even with time still left before expiration, I found I could only get about the intrinsic value no matter how much time was left. When I looked at bid and ask, bids were usually below intrinsic and ask way above. If I put in a trade at market, I would have sold below intrinsic.

These were all thinly traded so I am sure I was dealing with MM and not the public.

JackRab · Dec 1, 2016

ironchef said:
My personal experience:

Actually due to appreciations, I owned some DITM calls at times, to exit, even with time still left before expiration, I found I could only get about the intrinsic value no matter how much time was left. When I looked at bid and ask, bids were usually below intrinsic and ask way above. If I put in a trade at market, I would have sold below intrinsic.

These were all thinly traded so I am sure I was dealing with MM and not the public.

You're correct that you would trade against MM in this case. They would probably buy it of you at a small discount to intrinsic. They will have a scanner continuously checking for this. If say 5 or 10 cents (or a bit more, depending on underlying stock spread/liquidity) below intrinsic your offer should be lifted. Maybe more if there's only one MM active, in which case he could wait longer and take more of you.

If you want to know whether an ITM options still has time value left, look at the same strike opposite (in your case the put). If it has value left, the same value should be on top of intrinsic... (In case of a dividend, this doesn't hold).

ironchef · Dec 2, 2016

JackRab said:
If you want to know whether an ITM options still has time value left, look at the same strike opposite (in your case the put). If it has value left, the same value should be on top of intrinsic... (In case of a dividend, this doesn't hold).

Thanks. That is a very helpful suggestion for me for future trades of this type.