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When you buy put option like i should have done april 22nd when the BP oil rig was at 70% angle and on the verge of sinking ...Do you need to have the amount in your account to buy the equitie at the strike price when the expiration date arrive or you can just speculate on the put option to go up and sell it before the expiration date ...
Thanks
 

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Discussion Starter #3
put options

Thanks Berubeland, so you' re not obliged by law to have the $$$ to buy the equities at the expiration date ...
Let take this example :BP stock was trading april 22nd around $60, i don' t have the price of the put option for $60 expiration date may 22 let' s say $1.50, if i could have bought let say 5000 of put options at $1.50 for $7500, next monday ( 11 days later ) that put option will trade around $9.50 so i could have sold it 5000 x 9.50 that's $47500 a benefit of $40000 minus brooker' fee... right ?

Is there a possibilitie that i cannot sell all these put options ? And then i would loose them at the expiration date, since i don't have the money to buy all theses BP equities in spite of the fact that i would make a profit ...
 

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Is there a possibilitie that i cannot sell all these put options ? And then i would loose them at the expiration date, since i don't have the money to buy all theses BP equities in spite of the fact that i would make a profit ...
There is no possibility that you won't be able to sell them, but there is no price guarantee. Options are bought from and sold to pit traders. You are not buying them from someone selling them. When you put in your order to buy a put, the trader looks at what price he/she can short the stock and the price of a call option he/she can purchase to protect them and then quotes you a price for the put, with a really nice profitable spread from all of the above. If you buy it, he/she shorts the applicable number of shares and buys a call, all at the same time. His/her risk is zero and they pocket the spread. They will do this all the way to expiry and never tire of it.

I hope that helps.
 

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Thanks Optsyeagle that does help, nice legal scam the " ...the trader looks at what price he/she can short the stock and the price of a call option he/she can purchase to protect them and then quotes you a price for the put, with a really nice profitable spread from all of the above...."
What kind of a spread we' re talking about on when an option is listed at $1.50 or $9.50 ??? 2%, 5%, 10% ?
 

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Thanks Optsyeagle that does help, nice legal scam the " ...the trader looks at what price he/she can short the stock and the price of a call option he/she can purchase to protect them and then quotes you a price for the put, with a really nice profitable spread from all of the above...."
What kind of a spread we' re talking about on when an option is listed at $1.50 or $9.50 ??? 2%, 5%, 10% ?
Not sure. It varies with the option. Just look up the call and put pricing for the same strike, at the money option. I think the last time I looked, it was about $0.375 each. I think that means it is $0.375 for a round trip, selling and buying. Half that for each transaction. It adds up if you trade a lot of these.

I talked to a pit trader once and his comments was "yes, we make a lot of money in theory, but in practice, since pricing is not static, it is always reduced a little". In other words he sees a stock at $20. He quotes a call buy from a writer at $1.25, and quotes a put sale at $1.625. By the time he is done selling you the put at $1.625 and buying the call at $1.25, the stock has moved to $19.90 and he has no choice but to short it at that price. So his spread was just reduced by a dime, that he lost on the stock. This is a $20 strike price deal.

So in his view the spread is needed to cover these issues, plus make a whack of money.
 

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Another important point to remember, since a big misconception in options trading is that it is done between a buyer and a seller, when in reality, it is done to a pit trader and from a pit trader.

The reason this is important is if you write options enough, you will eventually be subjected to the occasional "early exercise". I have no idea why an owner of an option would want to exercise early, but I suppose they have their reasons. For the writer, this is a real pain, since it only happens when they are in the money and not only do you usually lose real money at these times, but your broker will also charge you a trading commission to add to your torment and aggravation.

The point I want to make is: why is your broker calling you to exercise this option? Many think that it is because the person that bought the actual option you sold, is exercising it. Since only pit traders buy your options, this is never the case. The broker is calling you because either your name popped up on their list first or you are the least liked client in their brokerage. I usually assume it is the former, but who knows. What you do here, is tell them that there is no reason to believe that your written option is being exercised and if you take enough offense to the excising of the option, they will, in many cases, move on and wreck another option writer's day, instead of yours (especially if this has happened more than once). You see, they are really just selecting someone, at random, to absorb the financial pain. Don't let it be you. Hold tough. Knowledge is your friend.

By the way, I almost never buy or sell options, and have grown tired of explaining why. For those that like them, good for you. I think you are wasting your time, but it is like the abortion debate; whatever side you are on in this debate, in 1000 years of debating no one will ever convince you of the merits of the other side, so I quick debating it a long time ago. Good luck to you.
 

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By the time he is done selling you the put at $1.625 and buying the call at $1.25, the stock has moved to $19.90 and he has no choice but to short it at that price.

By the way. If you are Goldman Sachs and you do this with mortgage back securities, the US government and a slew of US senators call it fraud. It's too bad they don't understand the business of Investment Banking. Oh well, maybe they will get a lesson in court.

Just an digression. I watched a few moments of the question and answer sessions and was fascinated how difficult it was for those Senators to understand the business of Investment Banking and bringing your risk exposure to zero. At times you need to short something, when you are selling something, etc., etc., but to the feds, it looks like you are betting against your client, when all you are really doing is bringing your risk level to zero. If you do it right, you break even. But when everyone else is losing Billions of dollars, it looks like fraud ... but it is only bringing your risk level to zero.
 

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Thanks a lot Optsyeagle, lots of concepets to assimilate, about the pit trader i wonder why would anybody sell a put option in the case of BP for example when the traders know, like everybody else that the equitie BP in my example is gonna go down and the put options will go up for sure after a major accident like the oil spill ?
Is it all covered by the explanation you gave me earlier :

" ... When you put in your order to buy a put, the trader looks at what price he/she can short the stock and the price of a call option he/she can purchase to protect them and then quotes you a price for the put, with a really nice profitable spread from all of the above. If you buy it, he/she shorts the applicable number of shares and buys a call, all at the same time. His/her risk is zero and they pocket the spread. They will do this all the way to expiry and never tire of it... "

I don' t want to put too much money in options it' s too volatile for my taste, but in the case of BP or RIG ( the platform maker ) theirs equities was bond to go down, so far minus $10 for BP and minus $20 for RIG ...Thanks again for the infos i think i get the picture better even though some parts remain blurred ...
 

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many of the above posted remarks from Optsy are patently absurd. They do not reflect any reality about options trading whatsoever. They are typical twilight zone fictions launched by a typical ignorant poster who, as he boasts himself, "never buys or sells options."


" ... Another important point to remember, since a big misconception in options trading is that it is done between a buyer and a seller, when in reality, it is done to a pit trader and from a pit trader.."

on the contrary, it is easily possible to identify players in options markets other than the dealer, specialist or market maker. Pit traders using open outcry are a colourful fiction left over from early options markets two and three decades ago. Today surviving pits on markets such as the CBOE are fully automated.

it's the presence of retail and institutional players that one looks for in options markets. I for one do not enter option orders when i observe that no one except the dealer is present, as is often the case in montreal. US options are far more liquid, with millions of trades being conducted daily. It is patently absurd to claim that the counterparty to every trade has to be the dealer.


" ... The reason this is important is if you write options enough, you will eventually be subjected to the occasional "early exercise". I have no idea why an owner of an option would want to exercise early, but I suppose they have their reasons."

once again our friend betrays his ignorance. Early assignments occur because of precisely-defined circumstances. Nearly always these are dividend x-dates; however deep-in-the-money options are also at risk in cases of mergers, acquisitions and corporate re-orgs where there has been a leak of information, or where complex information is poorly understood. For example, the recent global issuance of new shares by ING bank to pay back its debt to the dutch government through a complex multinational arrangement of rights was poorly understood by international markets, and the event triggered a massive exercise in US options written on the bank's US adrs.

slightly in-the-money options nearly always carry enough premium or time value to prevent early assignment. Some ditm options, in my experience more than 75% of them, also carry enough premium to protect against early assignment. There are formulas to calculate what premium, if any, exists.

using these formulas, option traders watch keenly for the above-mentioned critical dates and developments. They know which of their positions may be at risk, and they move to roll positions forward, up or down in order to get them out of the danger zone. Right now, for example, i'm working on july and august positions that i wish to improve. I have plenty of choices and plenty of time. I will be trading to counterparties, not to a barren market bereft of all players except the market maker.

i've kept the most hilarious part of Optsy's fiction for a 2nd post, because there are limits to the character count in each message. I'll close this message by quoting his remark, which of course was self-evident:

" ... By the way, I almost never buy or sell options ..."
 

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it's important in this forum not to mislead new investors. Most of Optsy's ideas - not all, but most - are pure fiction, and arise from a self-confessed lack of experience. To continue:

" ... The point I want to make is: why is your broker calling you to exercise this option? Many think that it is because the person that bought the actual option you sold, is exercising it. Since only pit traders buy your options, this is never the case. The broker is calling you because either your name popped up on their list first or you are the least liked client in their brokerage. I usually assume it is the former, but who knows. What you do here, is tell them that there is no reason to believe that your written option is being exercised and if you take enough offense to the excising of the option, they will, in many cases, move on and wreck another option writer's day, instead of yours (especially if this has happened more than once). You see, they are really just selecting someone, at random, to absorb the financial pain. Don't let it be you. Hold tough. Knowledge is your friend."

this paragraph is so fantastical that one can only burst out laughing. Early option assignments are handed out by the exchanges to the brokerage houses on a random basis. The brokerages where i trade both pass on assignments to their short position clients on a FIFO basis. This means that an old ditm position has a greater in-house probability of being assigned than would a position that had been sold only 2 days previously.

different brokerage houses have different assignment protocols. Although mine both use FIFO, other houses practice random assignments. In no cases whatsoever are the back offices assigning options because they "don't like" the client. These are data-processing teams working the back office on the graveyard midnight-to-8-am shift, as exchanges have up to midnight to assign early exercise notices and the brokers have to get all clients' accounts in order before the start of trading next morning. Thinly-staffed and hectic as back offices are, they have no time to even remotely consider whether a client is "liked" or not.

as for the absurd idea that one can strong-arm the junior brokerage representative who makes a courtesy phone call the next morning to advise a client of an early assignment, again one can only laugh. Where does this poster get such quaint ideas.


" ... By the way, I almost never buy or sell options ..."


need anyone say more?

in reality option markets are logical, highly mathematical puzzles that are both fun and profitable to solve, for those who have the knack. Parties who do not have a talent for this, or who hold a grudge because of a paltry few failures or assignments, should keep away. Far, far away.
 

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Please Humble, tell us what you really think. Try not to hold anything back.

I take it you didn't like my post. You put so much into that one, a guy can't really respond without an essay.

My point is that options are traded through a pit trader. Whether they are in an outcry forum or not, it doesn't change the fact that it is not between a writer and a buyer. I just wanted the OP to understand this in hopes that his question could be answered.

As for how early options exercise are dealt with, my point here is that it has nothing to do with the option you wrote.

You see, no essay required.

As for my decision to not trade in options. Why would you automatically think that it has something to do with my lack of understanding them? It is from my understanding of them, that generates my preference to avoid them. Each to their own.
 

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so, now you're saying that options are traded through a dealer or market maker (the lingo is no longer pit trader, that quaint term vanished sometime in the previous century.)

you're right this time. Originally you were claiming that all trades were to the dealer only. That was wrong. In most cases in US markets the specialist facilitates the trade between seller & buyer. As i said, it's easily possible to identify who is present in any given option market, and most experienced traders will never deal to the specialist.

" ... As for how early options exercise are dealt with, my point here is that it has nothing to do with the option you wrote."

This is wrong. Early assignments have everything to do with the option that is being exercised.

won't you please stay out of areas where you are lost.
 

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I don't recall the OP ever asking about writing options... which would be a brutal idea for a total newbie, so I'm not sure why that was brought into this thread.

Buying & selling options, whether puts or calls, is all that needs to be discussed here. The simple question posed by the newbie was whether he needed the cash to buy the equity when the option expires (the answer is yes BTW... unless it's worthless), or if he could sell (trade) the options which of course you can. As noted most options are never exercised and are simply sold at market. How they are sold is really not that exciting or important to your typical investor. The mentions of premiums and formulas and such would lead to much more useful research for the OP.

OE please don't cause me to agree with Humble too often, lol.
 

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How they are sold is really not that exciting or important to your typical investor. The mentions of premiums and formulas and such would lead to much more useful research for the OP.

OE please don't cause me to agree with Humble too often, lol.
Are not how they are sold, useful in understanding why there will always be a bid for his option?

The interesting thing about Humble's rant is that except for critiquing my use of lingo and how excised options are delt with and more than what was called for about my intelligence, he seemed to come to the same point.
 

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Are not how they are sold, useful in understanding why there will always be a bid for his option?

The interesting thing about Humble's rant is that except for critiquing my use of lingo and how excised options are delt with and more than what was called for about my intelligence, he seemed to come to the same point.
There will always bid a bid for his option? Perhaps. Premiums and discounts cover that in a far more useful manner than whether or not there is "a pit" involved.

You guys came to a consensus agreement? The only thing I noticed, or perhaps failed to, was that no one actually answered both of the simple questions ...
 

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" ... Q: When you buy put option like i should have done april 22nd when the BP oil rig was at 70% angle and on the verge of sinking ...Do you need to have the amount in your account to buy the equitie at the strike price when the expiration date arrive or you can just speculate on the put option to go up and sell it before the expiration date ..."

no one has answered the OP correctly. The original question presents a major confusion, of the type that are extremely common & typical with beginning option traders. The plain fact is that if a long put holder exercises his option, he will be short the stock. He will not be buying the stock, he will be selling it at the strike price. Assuming that he does not already own said stock, he will need to have sufficient cash or margin in his brokerage account to carry the short stock position.

"a long put position gives the holder the right, but not the obligation, to sell a particular stock at the strike price at any time prior to the expiration date."

there are other possible sub-interpretations of the OP's question:

1) at the time of purchase of the put option (ie "when you buy a put option ...") does the trader need to have aufficient cash or margin on hand to also buy the stock at the strike price.

answer: the trader is never going to buy stock with his purchased put. When he buys the put, he only needs cash or margin to cover purchase of the put.

2) if a put holder wishes to exercise prior to expiration date, does he need to have sufficient cash or margin on hand to buy stock at the strike price.

answer: if & when a put holder exercises, he will have a short stock position. He needs to have sufficient cash or margin in his brokerage account to cover this short stock position.

3) if an in-the-money put holder does not wish to exercise prior to expiration date, can he "just" sell the put.

answer: yes, but. The "but" aspect is that a deep-in-the-money put close to the expiration date will likely be bid a nickel or a dime less than intrinsic value. In other words, there is slightly negative premium. The novice trader at such a late date has no choice except to sell to the bid. He could learn from his experience that many if not most experienced option traders never wait past the monday or the tuesday of the final week of an option's life. I for one re-start most positions 2 weeks or more before expiration.

however, to continue with (3) a large and experienced holder of this itm put might choose to collect all of its intrinsic value, including the nickel or the dime, by exercising the option. He would need sufficient margin to support the resulting short stock position plus any calls that he might purchase to cover.

in conclusion, i believe this particular OP has a few of the slight confusions that are so common & so typical with beginning option traders. Not to be discouraged. The only way to learn is to ask questions and gain experience with tiny baby steps that won't dent the pocketbook. This OP's question suggests that he's a bit confused about puts (selling) and calls (buying), and he's also a bit confused about broker requirements for a long put position versus requirements for a cash-secured short put position.

usually, brokers that offer a lot of online option trading have platforms that prevent all except the safest steps for novice option traders, who are usually classed as level ones.

on a related topic, optsy and i have no consensus whatsoever. I am disappointed by the false ideas and absurd notions he has expressed. I think it's scandalous when an anonymous poster tries to take advantage of beginning investors, but i guess that comes with an open forum's territory. I myself know very little about real estate, for example, and so i would never post anything on that topic, but i certainly am learning a lot from reading it, thanks to the experienced posters on the cmf real estate threads. At the same time, it always puzzles me how the topic of options seems to bring out opinionated & aggressive posters who inevitably finish by saying they never trade options !!
 
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