So this might seem like a confusing question, but I think it's a valid one... imagine I buy a 200-Strike Call on SPY. Minutes before expiration, SPY is at 205, making my Call effectively worth $500. Now, imagine that, until expiration, SPY remains locked exactly at 205. My question is, who, during those final minutes and seconds, is willing to give me $500 for that Call?
Certainly, if you held that Call until expiration, you could exercise it by buying 100 shares of SPY at $200 a share and selling them immediately for a total profit of $500... but that would be several transactions, and transactions aren't free, even to brokers. And if transactions aren't free, then the last-second buyer (who I would be selling my contract to) would tack on a fee for performing the dirty work of exercising the option. Additionally, the buyer would want to make a profit for providing this last-second liquidity, correct?
So what I'm asking is, when I go to sell my Call at the last second, is it truly going to be worth $500, or will there be some sort of built-in spread even under ideal conditions? I don't hold options until expiration, so this isn't a big deal for me, but I'm just curious about this, since I never hear it mentioned.
Submitted April 19, 2014 at 10:59AM by confusedtrader http://ift.tt/1gUBppz
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