Is there any such scenario?
In Indian markets, such a situation occurs quite frequently in case of stock options.
Because of such occurrences, it becomes difficult to exit even profitable trades.
Here is an example from actual trade:
On November 17, 2017 I bought ACC 1800 PUT when the stock price was around Rs. 1809.
The price fell to near Rs. 1760 on the same day and I exited at Rs. 49.50 on the same day.
While I was in the trade, it was noted that there were very few trades happening and the BID ASK spread was quite big sometimes as much as Rs. 5.00.
That makes Options Trading a nuisance because the price discovery is not genuine.
Here is a look at the actual volumes from November 17 to November 30 ( Expiry Day ) :
Let us have a look at No. of Contracts.
Only 23 contracts were traded on November 17.
As the price fell and the PUT 1800 became In The Money, volumes dried up.
On November 23 and 24, not a single contract was traded.
Any trader who stayed with the trade had no way of getting out.
ACC is a stock whose Options are not traded in big volumes.
Let us look at another stock which made a very big move in December 2017/ January 2018.
Reliance Communications :
On December 25, in one of my answers I had suggested a few stocks to watch for volatility.
One of them was Reliance Communications.
It has shown extreme volatile movements in the current month.
Let us have a look:
On December 26, it opened at Rs. 16.55 and the low was Rs. 16.50. It moved up to Rs. 23 on the same day.
Three days later, it touched a high of Rs. 40.15.
A really HUGE move.
On December 26, 2017, if someone bought a CALL 20 for January 25, 2018 Expiry , and then saw the price moving up or down after that, this would be the situation:
On December 26, the CALL 20 could be bought for the open price of Rs. 1.80 or the low of Rs. 1.35 depending on the trader. The Last Traded Price on the dsame day was Rs. 4.00 giving more than 100% profit.
25 contracts were traded. It is okay because people were busy trading December Expiry contracts.
But on the day, the high price was touched and the CALL 20 was priced at Rs. 18.00, there were only 9 contracts traded.
From January 10 to January 17, 2018, even a single contract has not been traded. The buyers are stuck as they just keep on watching the stock price move up and down with no way to exit.
And they can lose a good chunk of profit if the stock moves down a few points before expiry. After all if it could move higher so fast, it can go down the same way.
Summary :
Yes, there are situations in which there are no buyers and sellers in Option Trading in case of stock options.
The trades generally happen at Strike Price near to current stock price.
It is advisable to keep moving to lower/higher strike price to remain in a liquid strike and stay with the trade.
A part of the profit can be lost but the exit is easy.
Thanks for reading.
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