Can option prices go negative?

Looking for pin-point answer.
Can option prices go -ve incase of short delivery of underlying or illiquid option or whatever reason. Like it happened in case of crude futures going -ve in Mar last year?
Because for Option seller is unlimited risk. So want to understand what is the mean of this “unlimited” risk?

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Futures price factors in the spot price, as well as the cost of storing the physical commodity on settlement of the futures contract (known as the cost of carry). Hence they went -ve.

Options is an obligation to buy or sell at some date, the shares of underlying. Cost of options is the price, buyer pays, for buying it at some date, which cant be -ve as the underlying always has some cost.

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No option price (premium) can’t be negative, it will be zero if it expires OTM at expiration.
Short delivery happen only when the option expires ITM and the sellers don’t have the underlying shares of the asset to give delivery.

Options sellers theoretically have unlimited risk because as the option goes ITM, risk increases for option writter.

Scenario 1:
Yes option price cant go negative. But can underlying stock price go negative? If I am PUT writer and stock price goes negative then I could suffer unlimited risk. For an CALL writer there is unlimited risk as stock price can go to any high. But for PUT writer the risk stop at underlying going to 0 (or can underlying value goes -ve also?).

Scenario 2: If I am PUT writer of illiquid option. And PUT is currently OTM. But since illiquid and PUT still OTM, can few scrupulous traders start buying very high price for the PUT and another party start selling high. I could suffer loss even if the option is still OTM?
eg.
Month beginning PUT strike price 100. Market price of Underlying 150. I wrote PUT at Rs 10.
On Expiry date, Market price of underlying Rs 190. But same PUT last traded at Rs 500 ? since it is illiquid some scruplous did last trade at price of Rs 500

stocks price won’t go negative… max it can go to is 0… not beyond that…

also… if option expires otm it will expire worthless.

As per my observation,
“according to exchange rules, stock or option price don’t go in negative”,
BUT
day traders / option traders go in negative mindset.
so never take a trade before complete knowledge, risk management, hedging / SL respect. enter the trade, if you are comfortable with the trade & risk reward ratio.

Could you guide me to where it is mentioned?

Thanks. That is what I am trying to do by asking this question.

well my bro,i don’t read exact words, but there are many info which claims so.
lets see below facts.
index / stock price never go in negative, so their isn’t possibility that any stock fut will turn in negative.
indian exchanges accept american option style, which are more safe than European options . many details you can get European vs american options.
In american options, settlement of ITM is only happens, OTM, ATM expire worthless.
On older website of NSE, i was found some option strategies, NCFM material & many other documents from various sources claims that option either expire with some positive value (i.e. ITM) other is will expire worthless.
may be @nithin sir can give more details.

Following zerodha site do allow to enter -ve values.


Does that mean -ve prices possible or there is bug in above site?

Definition of an option

An option is a contract giving the buyer the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) the underlying asset at a specific price on or before a certain date.

A buyer of an option has the right and not an obligation. So there is no way option prices will go negative as once it goes to 0, no option buyer will want to exercise the right. So as a buyer of an option, your risk is limited to the premium.

When you short calls or write call options, the security price can potentially go to infinity and hence there is unlimited risk.
When you short puts or write puts, the security price can go down to Zero. So technically if you are short puts it is not unlimited risk, there is a max cap. But like we saw with crude oil last year, where the options are on futures and futures went to negative, so even writing puts have unlimited risk if something like that happened.

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Can we buy option off market ? I mean can we create contract with someone or company ?

Does this is allowed in india ? Stock exchange has time limit. Can we buy option which is valid for a year in off market ?

An option on security is regulated by SEBI. So no, you can’t.

Btw, the sale agreement that you get into for buying a property, where you pay a token advance and sign an agreement saying you will come back and pay the full amount, is an example of a call option. :slight_smile:

This question come into my mind after I heard how Elon Musk got into agreement to buy option with Tesla based on Tesla Market cap target achievement.

If we have unprecedented liquidity crunch due to whatever reason on expiry date. Can that lead to PUT premium going very high inspite of falling stock price.

Negative pricing is currently only possible in certain commodities. As per SEBI’s circular in September 2020 -

3.2. To begin with, the commodities having the following characteristics may be in principle treated as susceptible to the possibility of near zero and negative prices: -

     3.2.1. Commodities that need specialized storage space in physical markets, which, if not followed, may cause environmental hazards or have other external implications AND

     3.2.2. Commodities that can’t be disposed of/destroyed with ease i.e. disposal/destruction of such commodities may cause an environmental hazard or may incur significant cost.


Also, last year when oil went into negative price territory, negative strike price options became tradeable. Those options had very little volume but the price quoted for those were positive -

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Falling stock price will lead to increase in ‘PUT Premium’ and thats the normal order of business. To watch out is for the IV spikes when PUT Premium can go up in spite of rising stock price.

Also, PUT premium can fall with falling stock price due to volatility implosion.

Its a mad world out there !

Ah, those are employee stock options. Those can be structured anyway by the company board. Options that trade on exchanges are standardized.

Negative options means buyer of the option will receive money from the seller of the option and also get the right to buy or sell the underlying at an agreed price at a future date. This is a win-win situation for the buyer.

It’s like someone is paying you money and also giving you insurance.

Thanks for the clarity. But I dont think it is correct interpretation.
Lets say you buy some CALL at 10 Rs. And on expiry it becomes 5 Rs. That means you have paid 10 and you will get 5 Rs. Now what will -5 means. it means you have paid 10. but you get -5. And -ve 5 means you have to pay Rs 5 to come out.
All this is hypothetical scenario. But if it happens this would be case.
In buy side -ve values of options will be problem.
In sell side -ve values of underlying could be a problem.

First, there are no buy sides and sell sides in the option market. There are Call options and put options. Traders can both buy and sell these contracts.

  • Call options’ premium increases(normally) when the price of the underlying increases.
  • Put options’ premium increases(normally) when the price of the underlying decreases.
  • and option premium can never be below zero.

Then there is the invisible hand of ‘Implied Volatility’ that sets everything upside down.