I buy far out options on things I think will go up. Usually already in the money. What would be the logical reason to sell these? Yes they can get pricey, but I wouldn't want to be on the hook for a year for maybe a $800 premium for something that is already in the money and could be exercised at any time. I am just trying to get into the mindset of the seller to make me a better trader overall.
Posted by Flat_Banana7061
5 Comments
The entity that sold you the contracts very likely have other contracts open that offset the risk of the stock going up.
They do not profit on stock movement but in the number of contracts you open and the difference between the bid and ask on the options.
They could be making $ on the buy writes. It’s not margin efficient, but can be safe for a profit.
Exercising early is a win win for them
Exercised at any time? How much extrinsic value will you throw away with that?
The seller is often a market maker who hedges buying the underlying asset.
honestly selling those itm leaps is usually just big institutions hedging their positions. they’re not worried about assignment since they can cover with shares they already own or just buy more.
It generally doesnt make sense to exervise an ITM option that far out because there is still a lot of extrinsic value in it. When an investor does the math it usually ends up being cheaper to just buy the shares rather than paying for the shares plus the theta cost and any other Greeks that may be elevating the price vs the raw share price. Of the small amount of options that actually get exercised most dont get exercised until they have run down to 45 dte or less due to the extrinsic value costs.
Does that clear things up a bit?