Beating Wide Spreads on Illiquid ITM Index Options

Wide Spreads on ITM Options in Illiquid Markets

Wide spreads on ITM options can quickly eat into your profits. ITM options are less liquid than ATM options and generally have wider spreads due to their significantly larger value. This makes trading ITM options in less liquid markets particularly expensive.

This dynamic is especially visible in the OMXC25 and OMXO20GI indices, and to a lesser extent in the OMXS30 index, all of which I trade often. There’s only a single market maker quoting OMXC25 and OMXO20GI contracts, and they always quote the highest spread allowed by Nasdaq. Given their monopoly in these markets, they never take any price inside the spread, and you have to fully cross it.

Here’s how I avoid paying the full spread on ITM options by using futures and put-call parity.

Futures Contracts

If you know how futures work and have maybe traded them before, feel free to skip this section.

A futures contract obligates the buyer of the contract to purchase the underlying asset at expiry from the seller. Unlike options, the buyer doesn’t have a choice, they have a contractual obligation to buy it.

In the case of cash-settled futures contracts, the buyer receives the difference between the settlement price and the purchase price in cash. For example, if a September-expiry SPX contract is traded at 620 points, and the settlement price is 625 points, the buyer receives $5 × 100 from the seller. If the settlement price is 615 points instead, the buyer must pay $5 × 100 to the seller.

Index futures are generally cash-settled. For the purpose of this blog post, it’s important that the futures contract and the options contract share the same multiplier, expiry, and settlement price. This alignment is critical for using put-call parity with futures.

Introduction to Put-Call Parity

Put-Call Parity is the relationship between:

• The value of a European call option
• The value of a European put option with the same strike
• The strike price
• The futures price with the same expiry

Put-Call Parity itself has been covered in detail elsewhere. CME Group has a great video and article on it. Read it here

The relationship looks like this:

Rearranged, it becomes:

This means a call option can be replicated by buying a put option, going long a futures contract, and borrowing cash equal to the strike. However, since futures are traded on margin, there’s no need to borrow money to enter the futures position. In practice, a call option can be replicated by simply buying a put and a futures contract.

Similarly for puts:

A put option can be replicated by buying a call and shorting a futures contract.

Trade ITM Options More Efficiently with Put-Call Parity

The replication methods above let us trade an OTM option together with a futures contract instead of an ITM option. In illiquid markets, this often results in better fills. In the following sections, we’ll look at three examples of how this works in practice.

Closing a Short Put

The OMXC25 index was at 1668.7 before market close on August 29, 2025. Let’s say you hold September 1750 puts, and now you want to close your position. The quoted prices for the put before market close were 78-84 DKK.

The spread on the 1750 call was much narrower. It was being traded at 0.75-2 DKK at the same time, while the September futures contract was trading at 1669.75-1671.25 DKK.

Without Put-Call Parity, you would sell your puts and receive 78 DKK today. But using Put-Call Parity, you would receive 0.75 DKK from selling the call, and buy a futures contract at 1669.75 DKK. At expiry, assuming the index settles at 1668, you would receive 82 DKK from your put, but would pay 1.75 DKK to settle the futures. Overall, you would have received 81 DKK, 3 DKK higher than just selling the put.

The settlement price doesn’t change your P/L. If the index rises, you would profit from the futures contract, but lose the same amount from the put losing value. If it rises more and crosses the strike, further profits from the futures are offset by losses on the short call. If it were to tank instead, losses on the futures are offset by gains from the put.

Closing a Call Spread

Now let’s consider a 1450-1500 September call spread (long 1450, short 1500) on the Norwegian OMXO20GI index. As of August 29, 2025, the index was at 1507.3 NOK before market close. Let’s say you purchased this spread and now you want to close your position and take profit.

To close the call spread, you would need to sell your 1450 call and buy back the 1500 call. The equivalent with Put-Call Parity is to sell a 1450 put and sell the futures, and buy the 1500 put while buying the futures. The long and short futures positions cancel each other out! So all you need to do to close this position is to buy the 1500 put and sell the 1450 put.

Here are the bid/ask prices for the options involved:
1450 call: 63-66 NOK
1500 call: 24.5-27 NOK
1450 put: 3.25-4.1 NOK
1500 put: 13.75-15.75 NOK

If you close using the calls, you would receive 63-27 = 36 NOK.

If you close with puts instead, you would have to pay 15.75-3.25 = 12.5 NOK today, but you would receive 50 NOK from the call spread if the settlement price is above 1500. If it’s below 1500 but above 1450, you would receive 50 NOK from the combined long call and put positions. If it’s below 1450, you would make 50 NOK from the put spread, while the call spread expires worthless. This means you receive 37.5 NOK by closing your position this way, saving 1.5 NOK on the spread.

Closing a Deep ITM Call With No Quotes

Now, let’s consider an example where using Put-Call Parity is the only way to close your trade. Assume you hold a 2400 September OMXS30 call option. The index was at 2629 on August 29. Neither the 2400 call nor the 2400 put was quoted, and you were not able to sell your calls and take profit. Since the put option is also not quoted, you cannot exit your position using the method we used earlier.

But if you look more closely, closing the position using Put-Call Parity would mean selling a 2400 put. At the current IV levels, that contract is worth less than 1 SEK. What you can do is simply sell the futures, but not sell the put. This means you give up a small amount by not selling the put, but you still manage to lock in your 229 SEK profit from the call. The long call and the short futures cancel each other out as the index goes up or down.

However, the lack of a sold put option introduces a new dynamic here. If the index tanks below 2400, you stop losing money on the call, but your short futures position keeps going up in value. This means your profit can actually go higher if the index falls below 2400! This is due to the fact that your current position of long call and short futures is equivalent to a long put according to Put-Call Parity, and therefore you profit if the index falls below the level of your synthetic put.

American Options

Note that Put-Call Parity only applies to European options, not to American options. This means you cannot use this method on stock options. You’d need to make adjustments and handle early exercise of a short option, and potentially exercise your own options early as well. Therefore, this method isn’t practical for American options.

Conclusion

Wide spreads eat into your profits. In the worst case, you might not even be able to trade if the ITM option is illiquid. Put-Call Parity is a powerful tool that enables you to secure better prices for your trades, and execute trades that wouldn’t otherwise be possible.