This article was originally published in The Option Strategist Newsletter Volume 17, No. 4 on February 28, 2008.
Most option traders are acutely aware of their costs – especially commissions, but also bid-asked spreads, slippage, and so forth. But there is one area that can prove very costly to an option trader if he’s not aware of how to navigate it – and that is selling an option that should be worth parity, but is bid below that level. Most of the time – but not always – these “parity” situations arise at or near the option’s expiration date.
