Q&A with McMillan: Who Buys Worthless Options at Expiration?

By Lawrence G. McMillan

One of our customers recently asked a good option-related question regarding the purchasing of worthless options at expiration.  This is a very common occurance so I figured my response is worth sharing with everyone.  See the question and answer below. 

Customer:

Dear Mr. McMillan,

...I observed that sometimes there are options which have no any value but still people buy them. For example, this Friday, VXX closed at 33.05. However after market close at 4:00 PM, 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?

McMillan:

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 2 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.

For more information on the option markets, refer to Options As a Strategic Investment.