The Stock Options market is often dominated by professional market makers and warrant issuers in terms of daily liquidity and open interest.
Warrant issuers typically buy stock options to cover their risk from shorting warrants. There may be a mismatch in strike and maturity. But the overall optionality risk could be hedged. Option market makers provide quotations continuously or upon quote request. They have a set of option fair values based on option pricing parameters. Market makers will make a market with their option pricing model and their fair value. They also adjust the fair value based on market conditions and supply-demand. I will explain more about option hedging in other articles.
Sell puts on stocks. Some institutions and individual investors like to sell puts on stocks as they feel that the stocks will not fall below the strike price on option maturity. Or they may want to accumulate stocks at the strike price and sell puts to enhance return while waiting for the stock prices to correct. Please note share price movement is unpredictable. The stock may rally after the investor sold the put options and the investor did not get to own the stocks and miss further upside performance. The stock also may fall much lower than strike upon option maturity and the investors suffer significant unrealized losses from paying the strike price for the stocks.
Sell calls on stocks. Investors who long the stocks may consider selling call options to enhance return. Some funds adopt a buy-write strategy. It means the fund will sell calls on their holdings regularly, such as monthly. Typically, the fund will sell at the money or out-of-money call options. This buy-write strategy is long-biased and works best if the underlying shares are at strike price upon maturity, this means the fund captures all the option premiums. But the fund would suffer losses if the stocks drop. Also, if the stock rallies above strike plus the option premium, this buy-write strategy would mean the stocks are called and the fund would not participate in any upside above the strike price. The fund is likely to have an algorithm to buy back the stocks at market price on maturity if the stocks are called. This has the effect of chasing high, increasing the cost of stock inventory.
In the US, there are exchange-listed weekly stock options and they are popular among the institution and individual investors. Please note when the option tenor gets to only 1 to 5 days, two of the basic assumptions in option pricing theory do not work very well. The first one is share price movement behaves in a normal distribution manner. As the tenor gets to only a few days, the movement is more affected by events instead of random. The second assumption is continuous pricing, ie the stock price trades continuously without gaps. This is often untrue between the day close and the opening on the next trading day.
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