Q&A: Who Buys Worthless Options at Expiration?

08/07/2014 8:00 am EST

Focus: OPTIONS

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

Options expert Lawrence McMillan of McMillan Analysis Corporation shares a question-and-answer between him and a customer about buying worthless options at expiration.

Question: ...I observed that sometimes there are options which have no value but still people buy them. For example, this Friday, VXX closed at 33.05. However, after market close at 4:00PM, I still could sell a few VXX Aug (8/1) 33 Puts, which will expire after a few minutes. These options are [technically] worth nothing but still someone will buy them. Do you know why?

Answer: With the underlying just 5 cents out-of-the-money, some traders who are short these puts might want to cover for either of the two following reasons:

Both involve traders who were short the VIX Aug 33 puts, and thus need to buy them back:

1) They fear a late move back below 33, which could happen if the VIX futures drop in price.

Or…

2) They want to roll their short VXX Aug 1st 33 puts out to a later month/strike, but they don't have the margin to be short double the number of puts over the weekend, so they cover the Aug 1 puts in order to be able to margin the roll to a later month.

By Lawrence McMillan, Founder and President, McMillan Analysis Corporation

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