No. of Recommendations: 2
I was looking at outs for a company I might not mind shorting, and I found something interesting. Ask prices on these outs that are higher than the strike price.
The stock price is currently 2.24, and here are prices for options expiring in about a year:
Strike price of 5. Bid is $1, ask is $5.20
Another Strike is 7.50. Bid is $3.50, ask is $8.50
If you buy a put, and the stock goes to 0, you gain the strike price, and stock prices cannot go negative, so it makes no sense to buy a put for more than the strike price.
From the standpoint of the seller, the money you earn from selling the put would be enough to cover the put being exercised. So you aren’t out any money waiting for expiration.
If I’m thinking about this right, why is there not always a market-maker type player willing to sell puts at a price matching the strike price? And is there a mechanical investment to be made being the one to offer this?
