I'm having some difficulty understanding how this sort of a trade example would play out. Some input would be very much appreciated!

Let's say $FB is trading at $184 today.

I write OTM naked calls at $200 strike, expiring Dec 21, for $9. I now have $900 in profit.

Between now and Dec 1st, $FB plummets to $100.

On Dec 1st, I still only have $900 of profit. But now, I can "buy to close" my position by buying $200, Dec 21, $FB calls for a lot cheaper premium than I sold it for.

I now have the $900 premium profit for writing the calls minus the price of the premium I paid to buy calls to close my position.


1) What if no one is selling $200, Dec 21, $FB calls. From what I understand, most people holding these calls will just let them expire worthless, meaning it's theoretically possible no one will sell $200 calls and also theoretically possible that no one is writing any $200 calls. Does this sort of liquidity issue occur in real life?

2) Suppose I did not enter a "buy to close" trade and it is now Dec 21st. What would happen?

  • 1
    "I write OTM naked calls ... for $9. I now have $900 in profit." No, you have $900 in cash, and have taken on a short position where you currently owe $900, so you have no profit. Only after the calls drop (reducing the amount you owe) do you have any profit.
    – nanoman
    Commented Oct 25, 2018 at 2:38

3 Answers 3


What if no one is selling $200, Dec 21, $FB calls.

Everyone has a price - the bid/ask spread might be very wide but if there is an ask then someone is willing to sell. If you put in a market order, then you will be matched up with the current low ask price. If you put in a limit buy order, then your limit will be the bid and you'll be matched up with the next market sell order.

But yes, theoretically it's possible.

Suppose I did not enter a "buy to close" trade and it is now Dec 21st. What would happen?

No one holding a $200 call would exercise it and buy the stock at $200 when they could buy it on the open market for $100. Your call will expire and you keep the original premium.

In other words, you don't need to "close" an option position. You can let the option expire. If the option is in-the-money it will be exercised and you might have to deal with the consequences (buy a stock to cover a sale, or spend the cash to buy the stock).

Seems like a no-lose scenario, right? What do you think happens if FB goes up to $250?

  • I may be wrong, but I don't think most options are actually exercised. The holder of an ITM option could insist on exercising it, but I think most just accept the spread from the writer. For instance, if FB went up to $250, the holder would just ask for the $50, rather than insisting on delivery of the stock. Commented May 18, 2018 at 15:56
  • 1
    @Acccumulation Equity options are usually exercised (at least mine always have been). Commodity options may be exercised less frequently since most option trading is for hedging/speculation and physical exercise is much more cumbersome.
    – D Stanley
    Commented May 18, 2018 at 16:04
  • @Acccumulation - Most equity options are American-style options which can be exercised at any time. European options can only be exercised at expiration (Indexes can be European or American style). The owner of the option can exercise the option if he wants the underlying position or he can STC in the option market. The only other scenario is a deep ITM option trading below parity and rather than take the haircut by selling the bid below intrinsic value, you simultaneously exercise and execute the opposing trade in the underlying, if the amount saved exceeds the commissions involved. Commented May 18, 2018 at 17:40
  • 2
    You guys are confusing exercizing an option and its delivery method. You can exercise or not an option and this option can be cash settled or physically delivered (underlying ofc). It does not make sense to say that you exercized an option but only asked for the intrinsic value as cash. What happens then is you exercized a cash settled option.
    – ApplePie
    Commented May 18, 2018 at 20:41
  • @D Stanley - Per 2017 CBOE stats, about 7% of options are exercised, 70% closed and 23% expire worthless. Commented Aug 22, 2019 at 16:19

When you write a naked 12/21 $200 call, you receive a credit for $9. It will not be a profit until 12/21 with FB trading below $200 and your call expires worthless. If FB trades higher between now and 12/21 then it's possible that the call may increase in value and you will be carrying a paper loss.

If FB has dropped to $100 on 12/01, your call will be near worthless. No one would be writing these calls because they would have a bid price of zero.You would have no problem buying back your call to close because it's the market maker's job is to make a market in the options.

If you waited until 12/21 then your call would expire worthless and you would avoid having to pay out a small premium for your BTC as well as the commission.

  • For an analogous situation, look at the FB 6/15/18 $85 put. Like the call in your example, it is $100 out-of-the-money. The current quote is $.00 x $.03 so there would be no writers because the premium is zero and it would cost 3 cents to close it. Commented May 18, 2018 at 14:12

I now have $900 in profit.

No, you have $900 in cash, and $900 in liabilities. Your net profit at this point is zero, minus broker fees.

1) What if no one is selling $200, Dec 21, $FB calls.

You can probably find someone if you're willing to pay enough. If there really is no one willing to sell, you have other options (no pun intended). You could cover the call by buying FB, or you could buy a call with a lower strike price. Suppose you buy calls with a strike price of $190. If the FB price on Dec 21 is less than $190, then both options are OTM, and nothing happens. If the price is more than $200, then you have to sell at $200, but you also can buy at $190, so you net $10. If the price is between $190 and $200, then you will get between $0 and $10.

Does this sort of liquidity issue occur in real life?

If FB were to seriously tank, then there might not be a market for high strike price options. This would happen if the market thinks that the difference between the value of a $200 strike price option and, say, a $100 strike price one is so negligible as to not be worth having a separate option. But in that case you can cover your call by buying $100 strike price calls without any significant loss compared to what you would have paid for $200 strike price, had they been available.

2) Suppose I did not enter a "buy to close" trade and it is now Dec 21st. What would happen?

The holder of the option can insist on you delivering FB shares, and pay you $200 for each share. If FB is trading lower than that, this would be a silly thing to do, but technically the holder does have the option (again, no pun intended). If, for whatever reason, Dec 21 passes without the holder exercising, then the options are expired. They are no longer valid options. Or, less technically: the options go ** poof **.

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