What happens if there are no sellers in deep itm option

F&O
1

Hi!
This is a hypothetical question. Say X writes an Option (Put or Call) and it is now ITM or Deep ITM. X wants to square off but no sellers or available. How big players (Smart Money) would play out this scenario?

2

That is a very tricky situation to be in. This situation can arise in many stock options. Your move should depend upon the following:

  1. Time from expiry: If there is still few days before expiry, you can wait for liquidity to come up again.
  2. Open Interest: Also keep checking open interest. If OI is very low, like equivalent to 10 lots or something, then you are in trouble as there are not many people who are having open positions in this option. Remember, people having open positions would like to transact to book profits or cut losses but if OI is too low, there may not be much action in this option.

But some trader who has earlier bought the option will turn up as the option is ITM and STT is huge for bought ITM options if the position is not squared off. Actually, you can have an upper hand because it becomes a buyer’s market and you can get some discounted premium.

3
  • If Put was sold, then sell the futures.
  • If Call was sold, then buy the futures.

That would lock the profits, (more likely losses), till the price move to the strike.

If the price makes the option OTM, the futures contract start losing more money. But then, if it is ITM or Deep ITM, the chances are less.

If you still want to protect,

  • If Put was sold, then sell the futures and buy a call at the same strike as put.
  • If Call was sold, then buy the futures and buy a put at the same strike as call.

There would be no more of loss or profit, and equivalent to exiting. But this involves additional transactions which costs money in addition to margin requirement.

One more probable addition to loss would be, on maturity, STT could be additionally charged if the ITM becomes OTM!

4

Thank You for clear explanation.