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Why do there exist In The Money options such that the premium is less than the difference between strike and stock price? I'm new to options and there must be something I'm missing because it seems to me this option can be bought and executed immediately for free, low-risk profit.

I'm looking at a call option for ACER that is in the money. The stock price is $2.73. the strike is $2.50. So the premium should be more than $0.23 but it's not. the asking price is $0.05. So what's to stop me from buying this option, immediately executing it, and then immediately selling the shares back to the market for a profit?( $273 - $250 - $5 = $18 ) is it because ACER is not very liquid? it looks to me like there is decent enough daily trading volume. I've seen options like this before but I saw them during the market after hours so I thought it was just that the data was all skewed being after hours. But this ACER one I found during market hours.

Screenshot of the call option

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  • Is this the Robinhood web interface? Is this on a desktop computer, on tablet, or on mobile?
    – Flux
    Oct 23, 2020 at 6:01

2 Answers 2

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You couldn't actually buy the option for $1 (0.01 display price is per share). Expanding to see option details at the moment shows:

enter image description here

While Mark shows $2.50 (halfway between $0 bid and $5 ask), the price is displayed as $0.01 due to lack of bids and no volume. Poor liquidity results in wide bid-ask spreads and makes pricing tricky as you have to put in an order much closer to the 'bid' to sell the option and much closer to the 'ask' to buy the option.

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  • Where did you get these details from?
    – Bob Baerker
    Oct 22, 2020 at 15:09
  • @BobBaerker From OP's brokerage, Robinhood
    – Hart CO
    Oct 22, 2020 at 15:10
  • Thank you for your answer! I see what you're saying but even if I paid the full asking price of $5 (even if I sweeten the deal by bidding $6) isn't that still less than the difference between strike price and stock price?
    – TumbleDryLow
    Oct 22, 2020 at 15:12
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    @TumbleDryLow That's the per share price, so current asking price is $500 for that option, meaning you'd need the stock price to go above $7.50/share to profit.
    – Hart CO
    Oct 22, 2020 at 15:14
  • ooh yes I get it now. thanks for your help
    – TumbleDryLow
    Oct 22, 2020 at 15:16
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Here are two rules to live by in the stock market:

  • There are no free lunches
  • If it looks too good to be true, it usually is

Unless you are looking at real time quotes, the quotes are stale. IOW, the last trade in the option could have occurred minutes or hours ago at a very different stock price.

The actual problem here is that you are looking at the bid price not the ask. Time and Sales yesterday shows the quote to be $0.05 x $0.80 during the after market (bear in in mind that option trading has closed and that these are stale quotes) so you couldn't buy the $2.50 call for 5 cents.

FWIW, if you are ever in a situation where you are going to exercise a call and then sell the stock, if you have the margin and the approval, short the stock first in order to remove leg out risk. And for a put, buy the stock and then exercise the put.

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