Why Out-of-the-Money Options Can Be Hard to Exit

Summary

The response addresses the difficulty of selling an out-of-the-money monthly call or put after its trading volume falls and its bid-ask spread widens. A theoretical price from Black-Scholes does not ensure that a buyer is available at that price, so a sell limit order may remain unfilled. Reducing the ask could attract a buyer, but may still fail or leave the seller with an unprofitable exit.

The central lesson is that future liquidity and a fair exit price cannot be guaranteed. Holding the option also carries time decay: its time value declines, and an option that remains out of the money at expiration loses the premium paid. The answer therefore judges the described approach to be a poor strategy when it depends on being able to resell an illiquid option. It gives no method for forecasting future liquidity, assessing spread risk in advance, or comparing alternative option structures, so its guidance is a concise warning rather than a complete trading framework.

Key ideas

• A theoretical option price does not guarantee an available buyer at that price.
• Falling volume and wider bid-ask spreads can prevent a limit order from filling.
• Lowering an ask may still fail to find a buyer or may make the exit unprofitable.
• An out-of-the-money option loses time value while held and can expire worthless.
• Future liquidity and a fair exit cannot be assured from the information given.

Tags

# Out of money option liquidity issue


# Out of money option liquidity issue












One buys an OTM monthly call/put option and after a few days the trading volume goes down and the bid ask spread goes up. He sets a sell limit order based on the Black-Scholes equation but the order does not fill due to low volume. Then how can one sell the option with profit? Or this is not a good trading strategy. In other words, how can one make sure that the OTM call/put option would have sufficient liquidity in future in order to trade at a fair price?

## Answer by Bob Jansen (score 1)

https://quant.stackexchange.com/a/61567

There is not too much to this. As stated, I’d say this is a bad strategy.

You can’t sell the option if nobody is willing to buy it. You can of course lower your price but this new price might not attract buyers or make you unprofitable. Every day you hold it, you’ll lose time value and if the option is still OTM at expiry you lose all premium paid.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.