How Does the Concept of “In-the-Money” Affect Counterparty Risk at Expiration?
If an option is deep in-the-money at expiration, the seller's obligation to deliver or pay is substantial. In an OTC trade, this significantly increases the counterparty risk to the buyer, as the seller has a greater incentive to default.
In a centrally cleared trade, the CCP absorbs this risk. The intrinsic value represents the risk at expiration.
