Want to sell but market maker offering below Intrinsic...

D

d0rian

So I've got a bunch of long calls I want to sell/close, with the expiration date 3 weeks away. I'm accustomed to seeing the Bid at 5 or 10 cents below an option's intrinsic value when there's only a couple days before expiration and there's very little time value left. When I found myself in that position (ITM option 1 day before expiration) 2 months ago, I just shrugged and let the MM make an extra nickel rather than deal with the exercise process.

But in this case, we're a full 3 weeks out from expiration, and already I'm seeing the MM's algorithm keeping his best Bid at 5-10 cents below intrinsic. A few Q's, I guess:
- Is it typical for this to happen with a full 3 weeks of time value left before exp?
- Is there anything I can do here...? I've tried putting in Sell orders at the buy/ask midpoint, essentially asking for a very modest time value premium, but MM won't budge.
- I assume there's nothing improper about this practice. I only ask b/c I know MM's have a fiduciary duty of sorts to maintain a liquid and orderly market with reasonable spreads; i.e. they can't just put up a $.01 bid and $1,000 ask and say "There's your market". So I assume the answer to "Why is MM doing this" is "Because he can".

Any pro-tips to deal with this situation?
 
d0rian said:
They can't just put up a $.01 bid and $1,000 ask and say "There's your market".
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If they did this, everyone would know which direction the market will go, and profit from this information. Alternately, they'd get filled by an informed trader and lose money.
 
d0rian said:
So I've got a bunch of long calls I want to sell/close, with the expiration date 3 weeks away. I'm accustomed to seeing the Bid at 5 or 10 cents below an option's intrinsic value when there's only a couple days before expiration and there's very little time value left. When I found myself in that position (ITM option 1 day before expiration) 2 months ago, I just shrugged and let the MM make an extra nickel rather than deal with the exercise process.

But in this case, we're a full 3 weeks out from expiration, and already I'm seeing the MM's algorithm keeping his best Bid at 5-10 cents below intrinsic. A few Q's, I guess:
- Is it typical for this to happen with a full 3 weeks of time value left before exp?
- Is there anything I can do here...? I've tried putting in Sell orders at the buy/ask midpoint, essentially asking for a very modest time value premium, but MM won't budge.
- I assume there's nothing improper about this practice. I only ask b/c I know MM's have a fiduciary duty of sorts to maintain a liquid and orderly market with reasonable spreads; i.e. they can't just put up a $.01 bid and $1,000 ask and say "There's your market". So I assume the answer to "Why is MM doing this" is "Because he can".

Any pro-tips to deal with this situation?
More...

What is the option you are trying to sell? There might be a borrow issue affecting the calls or a hedging issue. In some names the market maker won't be aggressive because he might be afraid that you have an angle. Institutional investors rarely trade the ITM option. They will trade stock and other options to create the synthetic. Unless they have an angle which would be virtually unhedgable for the market maker.

and they won't do .01 at 1000 because the market making community is very competitive. They will be constantly searching for that 1 cent of edge. If the best market were .01 at 1000, someone will improve to .02 at 999 and so forth until you get a more competitive stable market.

EDIT: took out dividend risk. Not relevant in American options.
 
Are you trading in the US?
If so, there are 12 option Exchanges with many registered MM trading in each.
Or are you referring to the NBBO?

r.
 
debitspread said:
Uhh, don't trade illiquid names? At least, unless you're willing to hold to expiry.
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Yup, definitely knew the risks in getting into a relatively thin option contract, this being one of them.

I regret polluting my OP with the irrelevant stuff about the $.01/$1K MM spread; I shouldn't have distracted from the main focus of my question: just whether this is basically SOP for thinly-traded option contracts, to which it appears the answer is yes. I was just taken aback that the below-intrinsic lowballing is already starting 3+ weeks before expiration. I expected it when time value is close to zero, but this seemed early. Was just wondering whether I had any other options other than hoping an Offer at the midpoint gets hit (no nibbles at all so far), or taking the intrinsic via exercise.
 
zdreg said:
is open interest a relevant number here?
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My first thought too -- that MM was well-aware that OI was low, so knew he could get away with a lowball Bid, as there didn't appear to be much in the way of competing interest. While OI is on the low side (70 contracts) on the contract I'm trying to sell, the OI on the Strike a dollar below mine has OI of 240 and MM's bid is similarly 5 to 10 cents below intrinsic. That being said, it's a relatively thinly-traded option chain so I think the general premise that I wouldn't be stuck with the MM's bid if OI #'s were higher isn't altogether off track. FWIW, it's a DITM contract (as are all the rest where I see below-intrinsic offers); not sure that factors in at all. Was bought ATM, prior to nice runup.
 
rb7 said:
Are you trading in the US?
If so, there are 12 option Exchanges with many registered MM trading in each.
Or are you referring to the NBBO?

r.
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Oh, actually this is a Canadian underlying, whose option chain trades on the Montreal exchange...which is known for lower liquidity, more MM shenanigans. Sorry to have left that out, wasn't sure if it was relevant (for anything other than to underscore the low-liquidity issue).
 
d0rian said:
Oh, actually this is a Canadian underlying, whose option chain trades on the Montreal exchange...which is known for lower liquidity, more MM shenanigans. Sorry to have left that out, wasn't sure if it was relevant (for anything other than to underscore the low-liquidity issue).
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When you trade instruments with low liquidity, like Canadian Options, there is nothing much you can do about it. Aside from their basic quoting obligations, MMs can do what they want. If they don't want to trade, they will post shitty markets.

r.
 
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