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The following is the screenshot of the NIFTY 50 option chain.

It is taken from the following link.

Enter image description here

Why are these people buying these significantly out-of-the-money options? In this case, it's the put option of 7300 strike price. It's highly unlikely that the Index will fall more than 500-600 points in this series unless very serious news comes out affecting the entire economy.

Even if the index falls by, let's say, 500 points, the value for that option won't change more than 0.50 or such price.

Specifically, what strategy are these people following where they could possibly benefit from buying such an option?

Peter Mortensen
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Namit Sinha
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4 Answers4

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A person with an opinion such as yours might sell these options because they think that there's a high probability that such options will expire. Why would someone buy them?

  • The options could be undervalued and a buyer could be attempting to take advantage of that (standalone or combined with other options in a more complex strategy).

  • Cheap long OTM options can reduce the margin requirement for some strategies, for example a credit put spread instead of a naked put.

  • Market makers and traders execute arbitrage strategies like conversions and reversals to not only lock in risk free gains but to lay off risk. For a simplified example, suppose XYZ is $100 and there's a buyer for June $80 calls. If the price is attractive to the call seller, he can sell the calls to the buyer and lay off the risk by simultaneously buying the stock and buying the June $80 put. The put purchase is part of a larger strategy rather than a standalone purchase that has a low likelihood of making money (just buying the June $80 put).

0xFEE1DEAD
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Bob Baerker
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They might be buying it as a kind of insurance for index trackers they own; they're guaranteed that they don't lose more than 28% of their investment (until June 11th) for only a small price; even if the market falls by, say, 40%, the options will (partially) compensate for the loss.

Glorfindel
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Someone who thought that they were worth more (ie, that they were cheap).

They only need to rise in value at some point in the future for the new holder to make money, as long as they can sell them to some one else for a higher price before expiry.

ThatDataGuy
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These answers are good.

If someone is selling a “put spread”, they may sell a moderately priced put, then buy this very far out of the money put so that they don’t tie up too much cash in their margin account.

Selling premium can be lucrative over time for far out of the money puts.

But if you want to stay in the game, you should always protect against the small risk of a complete meltdown.

Keith Knauber
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