lowest option price

spawlding · Aug 16, 2003

Do options have a price floor? What is the lowest price an option can go? I have never seen an option that is showing some degree of volume go to zero. It seems that .05 is the lowest a contract will ever be.

If this is truly the case, which I'm not sure of, could one find an option that is trading for .05 with a few weeks to go before expiration, buy it and sit on it. If it goes up to .10, you would have just doubled your money and if it stays flat, you would just buy it back a few weeks later before it expires. I realize that there are a few parameters that are worth mentioning in such a situation:First of all, the option would have to be out of the money....probably way out of the money to be trading so low with a few weeks to go. Secondly, it would have to be a very liquid option to provide a satisfactory level of probability that the contract could be bought and sold at this level. Granted, this would not be a risk free proposition; even if you are able to buy the contract at .05, that does not necessarily mean that you will be able to sell it again when the time comes. But is the theory behind this idea sound?

just21 · Aug 16, 2003

Do you buy lottery tickets? Market makers sell a lot of these things as they usually expire worthless. If it goes to .10 then you would sell it not buy it as you are already long.

Trajan · Aug 16, 2003

Quote from spawlding:

Do options have a price floor? What is the lowest price an option can go? I have never seen an option that is showing some degree of volume go to zero. It seems that .05 is the lowest a contract will ever be.

Unless things have changed, the lowest price for an option is a cabinet. If I remember right, it is technically 1 cent which doesn't cover commission costs for most. From my experience, it doesn't trade very often except when a brokerage turns the screws on a CS for some reason. As far as a realistic minimum price goes, it really depends on the stock. A MM will buy an option which theoretically is worthless if it closes down risk. After all, those three or four standard deviaton days seem to occur more than Black-Scholes implies.

Free Thinker · Aug 16, 2003

Quote from spawlding:

Do options have a price floor? What is the lowest price an option can go? I have never seen an option that is showing some degree of volume go to zero. It seems that .05 is the lowest a contract will ever be.

If this is truly the case, which I'm not sure of, could one find an option that is trading for .05 with a few weeks to go before expiration, buy it and sit on it. If it goes up to .10, you would have just doubled your money and if it stays flat, you would just buy it back a few weeks later before it expires. I realize that there are a few parameters that are worth mentioning in such a situation:First of all, the option would have to be out of the money....probably way out of the money to be trading so low with a few weeks to go. Secondly, it would have to be a very liquid option to provide a satisfactory level of probability that the contract could be bought and sold at this level. Granted, this would not be a risk free proposition; even if you are able to buy the contract at .05, that does not necessarily mean that you will be able to sell it again when the time comes. But is the theory behind this idea sound?

sure you could do this and get lucky with a buyout or something but the odds are so against it happening it isnt worth even trying.
i havent seen many options at.05 ask so you may have to go to a dime to get filled and you just doubled your cost.

freehouse · Aug 16, 2003

Quote from Trajan:

Unless things have changed, the lowest price for an option is a cabinet. If I remember right, it is technically 1 cent which doesn't cover commission costs for most. From my experience, it doesn't trade very often except when a brokerage turns the screws on a CS for some reason. As far as a realistic minimum price goes, it really depends on the stock. A MM will buy an option which theoretically is worthless if it closes down risk. After all, those three or four standard deviaton days seem to occur more than Black-Scholes implies.

The cabinet (0.01) is the lowest price, but not every broker will do this. Worthless options do trade at 0.01 near the end of the year for tax loss purposes (i.e., the option expires in January of the next year, but the holder wants to realize the loss in the current tax year).

white17 · Aug 16, 2003

If you buy it at a nickel ask, the bid will be zero. So if it stays flat you will have no one to sell it to to close your position.

murray t turtle · Aug 16, 2003

Quote from white17:

If you buy it at a nickel ask, the bid will be zero. So if it stays flat you will have no one to sell it to to close your position.

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May or may not be profitable;

add $1.20 + approximate or more for contract costs each if marketable at all.

Even though market maker profit isnt my main concern;
one elite trader, probably a market maker, noted a nickle put is carried on the books as worth about 1 penny.

Learned in the military, on taxpayer's nickle, real long shots are most difficult;
prefer closer with bow & arrows.

NasdaqTrader · Aug 16, 2003

When you bid or offer on an option contract,do you have priority in getting filled before the exchange specialists/mm's,like in the NYSE?

white17 · Aug 16, 2003

If your bid or offer is better than the MM, it must be displayed. Thats not to say that the MM won't take a trad away from you at that price if one comes along. The ISE is very good about price/time priority. Also, the MM's on oex options are pretty good about not stepping infront of you.