Today I noticed put options on a number of stocks with an ask price greater than the strike price. One example was USAC Sept-2020 @ $2.50 with an ask price of $4.80 around 2PM EDT.
Is their any strategy which would purchase an option at a greater premium than the strike price? Are people simply making short offers hoping somebody else makes a mistake and buys the put at market rate? It's there something else I'm not understanding?
n.b. At no point did I see bids greater than the strike.
USAC options are normally fairly illiquid. You can see that from the low open interest. That's even more pronounced in strikes near current price.
Price has dropped maybe 75% in the past month so it's been at it's current price (under $4) for only a short time and not much option trading has occurred at current strikes. When price gets that low, a lot of people just trade the stock instead of the options in order to have +/- 100 delta instead of an option's reduced delta.
We're in a volatile market now. At such times, if there's low interest in the options, spreads widen because the auction has few participants. So the market maker just puts up a ridiculously wide B/A quote. That's the mechanics of what you're seeing. You could say that anyone posting such a fat quote hopes that someone makes a mistake and buys options at the market but the root cause is market maker disinterest.
And no, there is no option strategy where one purchases an option that costs more than it's maximum potential intrinsic value (the premium is greater than the strike price).
