Question

Why do you think the most actively traded options tend to be the ones that are near the money?

250 words

Answer 1

There can be three reasons for why near the money options are most actively traded. Firstly, options can be used to used as a insurance to protect from any downside risk from drop in share price. So a long position in a stock can be hedged against any downside risk by purchasing a put option of near current price so that investor do not lose much in case the price falls. This strategy is also called as protective put. Secondly, a near the money optios has the highest time value so it has more chances to fall in the option than purchasing an out of the money option. Thirdly, due to high transaction colume of near the money options it provides an easy way to buy and sell contracts and avoid illiquidity therefore traders prefer near the money option.