How to exit Put Options?

Question

I just bought 4 stock Put Options that expire in Sept. 2006. I can't sell the underlying stock because i do not own the shares. Which can be MORE profitable? Selling the underlying shares or the fluctuation of the Option Contract itself?

Answer 1

Options premium = time+volitility+strike price. The above answer is right, that you can make more money in options because you are leveraging your money more. They say that options are more risky, and though I believe definitely more tricky, at least with options you know exactly how much money you stand to loose. When I want to "short" a stock, this is the only way I will do it, as it is much less risky move. If I'm not right I loose my premium. However if I am not right and shorting the actual stock, I could loose lots more money. When you exit your put option, you "sell the put to close", and that closes your position. Good luck!

Answer 2

Well, first off, your put gives you the right to sell 400 shares in the underlying stock, so it will rise if the shares fall in price. Second, the option value will carry some 'time premium' up until expiration, and that will dissapate with each day as time marches forward. This is true for any option. You are entering a crucial period for option ownership--in the last month the time value starts to decay rapidly, meaning that even if the underlying moves in the right direction it has to move sharply to overcome the increasing time decay pressure.

Generally speaking, if you are correct about the size and timing of a stock price move, playing that move with an option will give you a bigger percentage gain or loss, in large part because you can invest less.

For example, consider the following:

ABC = $40 and an ABC Dec 40 call is $3. Your choice is to buy ABC at 40 or buy the call at 3.

What happens if ABC goes to $45 immediately? ( Okay, lets say in the next two days.)

Your stock position would gain $5 points per share ($500 if you bought 100 shares) for a gain of 12.5%. Your option position would rise to about $8 for a gain of $500 on an investment of $300.

Answer 3

The posters gave good answers, but they left out a crucial bit of information. Are your puts in the money or out of the money? If they are in the money, you have both time value and intrinsic value in the option, so you can exercise the option or just sell the option. If it's out of the money, you only have time value left and with about 3 weeks till expiration, you are going to see rapid time decay. If you don't think the options will become ITM (in the money) before expiration, sell it and take the loss. If it's out of the money, you wouldn't want to exercise it as 1) I don't think you can exercise an out of the money option, and 2) you'd lose money.

When you exercise a put option, what happens is that your broker goes and buys the options and then puts it to (how it got the term "put") the person it was assigned to. Let's take an example: Let's say your Sep. 06 options have a strike of 40 and the underlying is trading at $42. It's out of the money, so if you exercised the option (if that can even be done out of the money), then your broker would buy 100 shares at $42 or $4200 and the assignee would have to buy it from you for $40 (strike price of 40) or $4000 - you'd lose $200. But, if the underlying were trading at say $36 and your exercised it, your broker (for you) would buy 100 shares for a total of $3600 and the assignee would have to buy it from you for $4000 or a $400 profit.

It's cheaper to just sell the option as an exercise carries additional fees I believe (assuming its ITM).

Answer 4

For American options (those that can be exercised at any time) you are always better off selling the options rather than exercising them -- except on the last day before expiration.

You can just call your broker and tell him to sell them.

If, for some reason, you wanted to exercise early (you might do this if you owned the stock, the options wer ein the money and you didn't want to keep the stock)., you can just tell your broker to exercise them. A warning though -- a friend once did this about a week before expiration, and the broker told him he couldn't do it early. He just pointed out that since they were American optins he could do it any time he liked. The broker then executed the trade.