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I'm starting to learn the ins-and-outs of options. For the time being, I'm only interested in selling call options of index funds. Browsing through the available options in Robinhood for the ETF IVV (An S&P 500 index Fund), I noticed this option at the top:

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As shown in the image, if I sell this call option, I make a profit if the price of IVV stays under $312.45 for the next 2 days (the option expires on March 29th).

The price of IVV as of today, March 27th, is set at $281.06, for it to reach the $312.45 price, it would have to go up by 10.93%. It is virtually impossible for this to ever happen.

So, my question is: why would anyone ever buy this option on the other side? I must be missing something. What am I not understanding correctly here?

  • Buyer expects an upswing and for a cheap price can make multiples of the difference between strike and market value if the option becomes ITM (usually the multiple is 100). May also serve as part of a hedging strategy on a short position. – ApplePie Mar 28 at 0:24
  • A 10% upswing of the S&P 500 in two days? Also, how would this hedging strategy work? If the index goes down, they lose. – AxiomaticNexus Mar 28 at 0:37
  • That could simply be the last sale price (and it could be days old) or the current open ask price and if so that seller isn't likely to get that price, but they are free to set their limit. Yahoo finance shows last trade dates but 310 strike isn't in range. 295 traded 3/25 and 290 3/22 for representative age potential. I don't know this broker's interface so I don't know what they are showing you. finance.yahoo.com/quote/IVV/options – user662852 Mar 28 at 1:21
  • @AxiomaticNexus if you are short on the ETF you profit from a decline in value but lose on an increase in value. If you buy a call on that same ETF then when the ETF increases in value you can cut your losses on your short position. – ApplePie Mar 28 at 1:33
  • The problem may be the word 'ever in the question: "Why would anyone ever buy this option on the other side?" Weeks and months ago, this OTM call could have been part of any number of option strategies, including call protected short stock. No one in their right mind would buy this call today at the market. Even paying a penny is overpaying :->) – Bob Baerker Mar 28 at 13:47
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You are correct that the option is massively overpriced. In particular, there are lower-strike March weekly calls that cost less, and therefore would always be preferable in any strategy. The fair value of the $310 call is a tiny fraction of a cent.

The explanation is that you are seeing the effect of a "stub quote" on an option so far out of the money, so close to expiration, that there is no longer active trading. I think you see $2.45 even though you would actually pay twice that -- it's probably displaying the average of a bid of $0 and an ask of $4.90. It is really the "back of the hand" from the market maker saying they don't care to deal with this strike any more. No one in their right mind would fill that ask.

  • That is correct. When you actually go ahead and try to place the order, bid-ask is set at $0 - $4.90. This order would never be filled. – AxiomaticNexus Mar 29 at 16:21
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This call isn't massively overpriced. It's a worthless option with no buyers and sellers offering a bid or an ask. As a consequence, the market maker is just displaying an off the wall price.

If you look at yesterday's closing prices, a number of the deep OTM calls and OTM puts have a bid/ask of $0.00 x $4.90 . Robinhood is quoting you a price of $2.45 which is the average of the bid and the ask.

In real time, the quotes for these options are are much less off the wall but they still have pie in the sky ask prices (75, 85, 90 cents, etc.). Pity the fool who fat fingers a trade and buys such options at the market.

Always remember that if it looks too good to be true, it usually is.

  • You're right. I assumed Robinhood would display only orders that have a reasonable chance of being filled, I see now that that's not the case. The reason why I asked the question is because this just looked too good to be true, so I wanted to find out why. – AxiomaticNexus Mar 29 at 16:14
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Lots of reasons to buy that call option, typically part of non-directional and partially directional strategies like Iron Condors and Calendar Spreads. Verticals can be fun too. Collars for the risk averse.

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    Reason to buy that call? Perhaps several weeks or months ago but not two days before expiration and 10% OTM. – Bob Baerker Mar 28 at 13:38

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