ridiculous Bid/ Ask Spread

H

Humble Investor

I've been looking at the ADP 1, 87.50 May 2015 call options for a while now and the spread is just ridiculous.

This option is a bit more complex than 100 shares option contracts. It consists of 100 shares of ADP, 33 shares of CDK and $10.18 in cash. CDK was spun off from ADP in October 2014. The contract is going to expire tomorrow and if you exercise it you are going to get about $18.55.
Currently the Bid is 16.20 and and the ask is 19.90. I looked at the the price of the call in Bloomberg Terminal and they were trading for about a dollar back in October.
My questions are:
1. How to get a better price than a bid? ? Is it not better to exercise the option in this situation? Or is it just better to put a limit order at the mid point or even a bit closer to the bid?
2. The open interest is currently at 7. For future purposes, If I want to buy around 750 contracts, What's the best way to accumulate several hundred contacts with little or no open interest? Should I call the IB desk? Will I face any problem when I went to get out at near expiry? Thank You.
 
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Corporate action options are basically untradable.

And if someone will provide liquidity it won't be anywhere near mid.

I'm not even sure if they allow opening transactions.
 
newwurldmn said:
Corporate action options are basically untradable.

I'm not even sure if they allow opening transactions.
More...
I only tried once or twice, but the adjusted contracts were closing only at IB. Sometimes it was that way at the exchange level, so using other brokers won't necessarily help.
 
Thank you for your reply. I don't want to buy adjusted contracts. I want to buy several hundred standard contract with no or little open interest. However the company soon will go through a spin off and and I am planning to sell or exercise my options few months after the spin off.

1. How should I go about buying several hundred contracts with no open interest? I am talking about STANDARD OPTIONS ONLY. Should I call IB desk?

2. If I want to close my adjusted contracts few months after the spin off, Will I face any liquidity problem? Is it not easier to exercise the calls and immediately sell the underlying? (same day substitution)

Thank You.
 
You will face liquidity issues in both directions. Use limit orders at the price you want to enter and exit. Decide how much you are willing to give away to Fair value, whatever you feel that is, and slowly move your limit to that price and hoping for an execution. If that does not work, you can call the trading desk and ask for a market.
 
Is it not easier to exercise the call and immediately sell the underlying? The net proceed will be about $18.50 (excluding the premium and commissions) while the bid is $16.20?
 
Humble Investor said:
Is it not easier to exercise the call and immediately sell the underlying? The net proceed will be about $18.50 (excluding the premium and commissions) while the bid is $16.20?
More...

It might be easier to hedge by shorting each component in the correct ratio, then exercise. Or exercise then liquidate the next day. The 1st method provide more control of price as the next day leave you open to price movement. Margin might also be an issue. I'm not sure what type of account you have and if you can short the securities.
 
Thank you. I have a cash account and do not want to use margin to exercise the calls as something like flash crash could happen. How long does it take for IB to deliver the underlying? Is it usually on the same day? When Do I need to come up with money? (In this case $8750). I want to exercise my options one by one, so I don't need to borrow.
 
You should have enough to cover margin in your account before. Call IB if you have questions about that.
 
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