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The following is the screenshot of the NIFTY 50 option chain.

It is taken from the following link.

Enter image description here

Why are these people buying these significantly out-of-the-money options? In this case, it's the put option of 7300 strike price. It's highly unlikely that the Index will fall more than 500-600 points in this series unless very serious news comes out affecting the entire economy.

Even if the index falls by, let's say, 500 points, the value for that option won't change more than 0.50 or such price.

Specifically, what strategy are these people following where they could possibly benefit from buying such an option?

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    What makes you think it's "absolutely clear" it won't fall, particularly in the current world situation?
    – Ganesh Sittampalam ♦
    Commented Jun 6, 2020 at 11:51
  • okay maybe my wordings are too extreme and there is nothing certain like that in ecomony. What i am thinking is why are they buying/selling options of that strike price whereas its better to trade at a strike price slightly less further than OTM that.
    – Namit Sinha
    Commented Jun 6, 2020 at 11:54
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    "It's highly unlikely that the Index will fall more than 500-600" - Which is why they call it gambling
    – Valorum
    Commented Jun 7, 2020 at 14:47

4 Answers 4

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A person with an opinion such as yours might sell these options because they think that there's a high probability that such options will expire. Why would someone buy them?

  • The options could be undervalued and a buyer could be attempting to take advantage of that (standalone or combined with other options in a more complex strategy).

  • Cheap long OTM options can reduce the margin requirement for some strategies, for example a credit put spread instead of a naked put.

  • Market makers and traders execute arbitrage strategies like conversions and reversals to not only lock in risk free gains but to lay off risk. For a simplified example, suppose XYZ is $100 and there's a buyer for June $80 calls. If the price is attractive to the call seller, he can sell the calls to the buyer and lay off the risk by simultaneously buying the stock and buying the June $80 put. The put purchase is part of a larger strategy rather than a standalone purchase that has a low likelihood of making money (just buying the June $80 put).

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  • can you please elaborate on your third point ?
    – Namit Sinha
    Commented Jun 6, 2020 at 12:37
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    You can replicate a forward by buying a call and selling a put at the same strike and maturity. If the forward is cheaper, you can buy it and sell a synthetic for a theoretically risk-free profit.
    – 0xFEE1DEAD
    Commented Jun 6, 2020 at 14:39
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    Read THIS and THIS
    – Bob Baerker
    Commented Jun 6, 2020 at 15:01
  • Another example like this is the long/short play. For example, a trade might be limited to a bet on one company outperforming another in the same sector - go long Airbus and short Boeing. This type of play produces returns so long as Airbus outperforms Boeing, regardless of whether the overall aviation or global market (or either of the shares themselves) are going up or down. Now, if you look at the Boeing short in isolation you might ask why the trader thinks Boeing is going down, but that's wrong, and the trader may not think that at all because it's not important to the strategy.
    – J...
    Commented Jun 8, 2020 at 16:07
  • A L/S pair trade with shares seeks expansion or contraction of the spread, depending on whether the higher priced leg is long or short. Adding options to the mix complicates the pair, either converting legs to synthetics or doubling up. The puts that the OP highlighted are 27-28% OTM, expiring in one week. I don't see them as a viable pairs standalone or a useful addition to a L/S equity pair.
    – Bob Baerker
    Commented Jun 8, 2020 at 16:33
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They might be buying it as a kind of insurance for index trackers they own; they're guaranteed that they don't lose more than 28% of their investment (until June 11th) for only a small price; even if the market falls by, say, 40%, the options will (partially) compensate for the loss.

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    While it's possible that this OTM was bought as insurance, it's not likely because (1) this put is very far OTM and therefore it is a very poor hedge and (2) expiration is only a week away and hedgers tend to sell further weeks (or months) because the premium cost per day is much lower for longer expirations.
    – Bob Baerker
    Commented Jun 8, 2020 at 14:24
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Someone who thought that they were worth more (ie, that they were cheap).

They only need to rise in value at some point in the future for the new holder to make money, as long as they can sell them to some one else for a higher price before expiry.

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These answers are good.

If someone is selling a “put spread”, they may sell a moderately priced put, then buy this very far out of the money put so that they don’t tie up too much cash in their margin account.

Selling premium can be lucrative over time for far out of the money puts.

But if you want to stay in the game, you should always protect against the small risk of a complete meltdown.

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