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Any explanation for why a call option would be priced so low per contract like the following example: Current stock price $3.90 / Call / Jul17 / Strike $2.50 / Ask .05 / Ask Size: 20

I've seen a few like this when researching stocks and am curious as to why a call option that seems to be "in the money" would be priced to where in theory your looking at a positive return upon executing the purchase of the call option? I'm brand new to options and am probably missing something, but I can't figure out what I'm not seeing.

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    What stock is it? Where did the quote come from? It's possible that the stock has tanked today, no one has a offer higher than 5 cents, and no one has snagged up this limit order, but it seems highly unlikely. The call has an intrinsic value of $1.40. – D Stanley Jun 6 '17 at 18:45
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    Try to get a fill on that ask price. Buy all you can. – JoeTaxpayer Jun 6 '17 at 19:11
  • I suppose another possibility is that the company is expected to pay a huge dividend before the option expires. But it's more likely a data error. – D Stanley Jun 6 '17 at 20:02
  • Yes D, if it were a European style option. A American option can exercise any time, so has to trade at or above intrinsic value, give or take a few cents. – JoeTaxpayer Jun 7 '17 at 0:38
  • would having a delta of .1006 factor into why the price is so low? – SpeculativeTrader87 Jun 7 '17 at 0:56
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When I log in to Schwab to look at these options it tells me there's only Adjusted Options available on these terms:

Adjusted Options: Multiplier: 100; Deliverable: 15 PTIE; Cash: ----

It does confirm your July Call quote price of $0.05 because the contract, though priced for 100 shares, will only deliver 15 shares. Separately, looking at the company website for news there was a 7 for 1 Reverse Split announced on May 8, which is the culprit for this option adjustment and the seemingly nonsensical call price.

  • Thank you for the feedback. Makes sense. I can't see where the contracts I purchased are adjusted to 15 from 100 on OptionsHouse. I'll have to reach out to them regarding this. – SpeculativeTrader87 Jun 7 '17 at 20:07
  • @quid I think it's the other way - a $2.50 strike for 100 shares pre-split is a $17.50 strike for 15 shares now. I suspect the provider didn't adjust the strikes for the split. – D Stanley Jun 7 '17 at 22:31
  • @DStanley, right, it's actually way out of the money now. – quid Jun 7 '17 at 22:34
  • @quid well, it was then, too... – D Stanley Jun 7 '17 at 22:35
  • Isn't this still a good trade? If it costs $81.24 total including comm and fees to secure a call strike price of $2.50 on 20 contracts = 300 shares currently trading at $3.80. $2.50x300=$750 + $81.24 = $831.24 then sell shares at $3.80 = $1,140 - $4.96 (comm+fees) = net profit $303.80 – SpeculativeTrader87 Jun 8 '17 at 17:16
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EDIT

quid keenly identified the 1:7 reverse split In May 2017. In a 1:7 reverse split, your shares are worth 7 times as much per share but you have 1/7 the amount of shares. A share worth $3.78 now was worth (all else being equal) $0.54 a month ago. So a call with a $2.50 strike a month ago was well out-of-the-money, and would now be the equivalent of a call with a $17.50 strike. A $17.50 call with a $3.78 underlying (or a $2.50 call with a $0.54 underlying) would reasonably be worth only 5 cents.

So I now suspect that the quote is a stale quote that existed pre-split and hasn't been adjusted by the provider.

OLD ANSWER

I can find no valid reason why those calls would be so cheap. The stock price has been trending down from its onset in 2000, so either no one expects it to be above $2.50 in a month or it's so illiquid that there's not any real data to evaluate the options.

They did pay some massive (30%) dividends in 2010 and 2012, they've been hemorrhaging cash for the past 4 years at least, and I have found at least on "strong sell" rating, so there's not much to be optimistic about.

NASDAQ does not list any options for the stock, so it must be an OTC trade.

With an ask size of 10 you could buy calls on 1,000 shares for $0.05, so if you can afford to lose $50 and want to take a flyer you can give it a shot, but I suspect it's not a valid quote and is something that's been manufactured by the option broker.

  • It was a 7:1 split. The options just can't bind partial shares, and according to the statement from the company, partial shares will be rounded up to the next whole share. – quid Jun 7 '17 at 23:00
  • @quid you are right about the fractional shares. I've updated the math to account for a 1:7 reverse split. – D Stanley Jun 8 '17 at 3:09

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