What is a "cabinet" bid? -- E.S.

A cabinet trade or bid allows options traders to liquidate deep out-of-the-money options by trading the option at a price equal to one-half the normal tick. It's defined as the lowest possible tradable price for an option. An important point is that trades done at the cabinet bid can only be for closing positions. You can't initiate, long or short, new positions at the cabinet price.

For example, the normal minimum price fluctuation for options on the

S&P 500

futures contract is one-tenth of a point, or $25. But the Chicago Mercantile Exchange's clearing system has allowed for a cabinet bid of one-twentieth of a point, or $12.50.

But as trading shifted from fractions to decimals, the minimum tick for most equity options has been reduced to $5, essentially eliminating the practical need for cabinet trades on stock options. Still, many futures-related contracts, because of their leverage, maintain an expensive "minimum tick," making the cabinet bid a useful tool for closing out positions.

This past week's rally provides a great example of why it might be prudent to buy to cover a short position in what might seem to be worthless options. Many call options, both for stocks and indices (to say nothing of bond, oil and gold puts), were so far out of the money just seven or eight trading days ago that they were offered at the minimum price.

I'm sure some people who were short those options thought that paying anything, even a dollar, was throwing money out the window. And I'm sure that considering that those contracts are now in the money and worth hundreds of dollars, those same people regret not taking the prudent path.

The lesson of "anything can happen" is usually painfully learned. Remember that no trade is over until the position is closed. When an option has a cabinet bid or offer, it should be taken as sign that the risk/reward profile has hit the extreme. Anyone still with an open uncovered short option position should take advantage of it and get out.

If you own options, the decision is yours whether to sell at the cabinet price. If you only own a few contracts, it might not be worth trying to salvage $20 to $50. But if you're long several hundred options, the proceeds from a sale can be significant, rather than expiring worthless.

Now, a follow-up to

last week's column regarding expiration. I wrote that "the expiration or settlement dates for all three occurs on Saturday, March 22, but in 1997, rules were instituted that have the various securities cease trading on a staggered basis." I received a lot of questions regarding when particular contracts stop trading, their expiration dates and the accompanying settlement price.

Rather than go through each product, I would ask readers to check the

Chicago Board Options Exchange Web site. That's the exchange where equity option, index option and exchange-traded fund specifications are provided. For information on futures and their options, please go to the appropriate exchange's Web site, such as the Chicago Board of Trade for bonds, the Chicago Mercantile Exchange for currency and S&P futures or the New York Mercantile Exchange for gold and oil.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

Steve Smith.