Is there a case, where due to illiquidity, exercising out-of-the-money options could be better than directly buying the stock?
When a stock is too illiquid, there are some costs because of this illiquidity. Ie, directly buying the stock through a market order could move the price too much.
So, if you exercise options that are out-of-the-money, you won't move the market and won't pay the cost due to the illiquidity.
There is a stock XYZ whose market price is \$10.00.
You have 100 call options with a strike of \$10.08. (Assume they are very close to maturity, so that the premium is worth nothing or nearly nothing).
If stock XYZ is too illiquid, buying 10,000 shares could move the market and you can end up buying it at an average price of \$10.15. In that case, exercising the option would have given you a better price, even thought they were out-of-the-money.
Is such a case possible? If so, exercising options that are out-of-the-money can be worth it, right?
Or am I missing something and my example is not possible (because there would be an arbitrage opportunity for example)?