Deep in the money put options

A long put gives you the right to sell the stock at the strike price.

The 2/05 '21 $800 put costs $584.90. You have the ability to sell the stock for $800 and based on your quoted price of $225, the counterparty agrees to overpay you $575 if assigned. That is called the intrinsic value of your put option. Since your put costs $584.90, you are also paying $990 ($9.90 premium) in time value.

When you exercise a put, you lose the time premium so if you exercise it immediately, you will lose $990 ($80,000 - $22,500 - $58,490).

Why would anyone sell this put?

• First reason:

Normal equity margin is 50% so at $225, it would require $112.50 of margin.

Normal CBOE margin for an ITM short put would be:

100% of option proceeds plus 20% of underlying security/index value less out-of-the-money amount, if any, to a minimum of option proceeds plus 10% of underlying security/index value for calls; 10% of the put exercise price for puts.

So the effective margin would be about 20% which is less than 50%.

For stocks like GME over the past two weeks, some brokers made the stock non marginable. I don't know to what extent, if any, they made the option margin requirement more stringent but it was likely still lower.

So the short answer would be that someone bullish on the stock could short a near 100 delta put for less margin and receive a time premium of $9.90.

• Second reason:

If the stock rises sharply, the seller will keep some portion of the intrinsic value and even all of it if his short put expires worthless. If his margin cost for the short put is lower than that required for buying the stock then his ROI will be higher at $800 than if he bought the stock instead.