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"Can I Sell Options For More Than What Market Makers Are Bidding?"

Question By Fas

"Can I Sell Options For More Than What Market Makers Are Bidding?"

Can you exercise to sell an option for more than the marketeer is asking?

Asked on 24 Jan 2012

Answered by Mr. OppiE

Hi Fas,

Even though I understand what your question refers to, I would like to first correct some of the wrong terms you are using so that there is no confusion in future when you learn more about options trading.

First of all, I believe that you are asking me about selling an option, whether to open a new short position or to close an existing long one, right? In this case, you really shouldn't be using the term "exercise to sell" as selling an option and exercising an option are totally different things. In fact, if you give a verbal instruction like this to an options broker, you could end up getting your options exercised instead of sold for very different outcomes. To exercise an option is to exercise the rights in the option to either buy or sell the underlying asset at the strike price. This is totally different from simply selling off the option without exercising. This is an extremely important distinction to make.

Secondly, there is no such thing as "marketeer". The people who are making market are known as "Market Makers". Although this isn't a critical distinction to make, it helps people understand you better. Also, you never sell at the price market makers are "asking", which means ASK Price. You always buy on the ASK and sell on the BID. This means that when you sell an option, you always sell on the BID price, which means selling at the price market makers are BIDDING at, not asking at.

Finally, your question, can anyone sell an option for more than what market makers are bidding for? The bid price is what market makers are willing to buy an option for at that particular point in time. This means that it is impossible to sell to someone something at a price higher than what that person is willing to buy at and therefore impossible to sell to market makers at that point in time at a price higher than what they are bidding for. However, what a lot of options traders do is to queue using a limit order at a price higher than the prevailing bid price and if market makers are willing to raise their bid to that price, your order gets filled, otherwise, you miss your exit. This means that even in this case, you are still selling at the bid price, its just that market makers raised their bid price for whatever reasons there may be.

In conclusion, it is possible to sell an option for higher than the prevailing bid price by queuing your sell order (be it Sell To Open or Sell To Close depending on what it is you are trying to do) at a higher price using a limit order. If market makers later increase their bid price to your queued limit price, your order gets filled, if not, you miss the selling trade altogether. This is especially so in bear markets where prices are moving downwards rapidly. You could actually miss your selling trade and ending up with much less profits or deeper loss depending on whether your position is a profitable or losing one.

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