How to sell option with no volume

Question

If there is no volume on options you want to buy/sell, should you do any transactions with those options?

Here is my scenario:

I recently bought two puts of an industry ETF. A few days later it was showing an unrealized gain but all strike prices for January (my expiration month) showed zero volume. I thought this meant there would be no one to buy the options I was ready to sell.

I can see option prices and volume change in real time with my platform. I went ahead and put in my sell limit for both options. Surprisingly, it executed immediately and I saw the volume for that strike go from zero to 2.

Does that mean there will always be buyers/sellers even if volume shows zero? Or can you get stuck holding your options until expiration (at which point they expire worthless) because there are no buyers?

Answer 1

Volume @ 0 doesn't mean that there are no buyers and sellers, it just means that there hasn't been any trades done yet. What you need to look for are the bids and offers (for selling and buying, respectively). For further expiration and NTM or IT options there will almost always be a bid and an offer (but it may be very wide).

Now, in case where there is 0 bid (no one is willing to buy), you may still have a chance if the option has some value in it. For that - you need your broker to try to shop it to market making firms. Now, depending on who your broker is, this may or may not be possible. Alternatively, if you have DMA (direct market access) to the options exchanges, you can try to put in an offer of your own and wait for someone to execute against you, however do not expect to be traded with unless your price is out of line with the cost.

However, in wide markets, you can try Lampost options (they may give you price improvement) or try to offer very close to the bid. You may save yourself a penny or two and perhaps get a rebate if you are using BATSO or NASDAQO markets (if you have DMA and pass-through exchange fees).

Answer 2

A few observations -

A limit order can certainly work, as you've seen.

I've put in such an order far beyond the true value, and gotten back a realistic bid/ask within 10 minutes or so. That at least gave me an idea where to set my limit.

When this doesn't work, an exercise is always another way to go. You'll get the full intrinsic value, but no time value, by definition.

Per your request in comment -

You own a put, strike price $100. The stock (or ETF) is trading at $50. You buy the stock and tell the broker to exercise the put, i.e. deliver the stock to the buyer of the put.