An off-market transaction whereby an option’s holder exists a nearly worthless, usually deep, out-of-the-money option position. Such a trade is executed at a premium smaller than the standard minimum price increment for such an option. For a given option product, the respective product chapter sets the standard minimum price increment and outlines the permissible trade price levels (i.e., minimum tradable prices).
Cabinet trading takes place at a price smaller than one tick (a price equal to one half of one percent of the face value). Closure of a worthless position is meant to help recover a faction of the losses.
A cabinet trade cannot be used to initiate short or long positions. It is a “last resort” course of action.
