question about exercising a put option (borrowed shares)?

Question

Let's say you bought a put option and decide to exercise it at some point. Since you are in theory selling shares of stocks you borrowed (from the broker I assume???) is there a chance that those shares will not be available to be sold when you go to exercise it? Or will your put always be executed?

Answer 1

When you exercise a put, you have to deliver shares to the buyer. There are three ways that you could do this. You could deliver shares that you already own, you could buy shares in the market to deliver or you could borrow the shares from the broker and deliver it later.

The second and third options are somewhat expensive to do -- because of extrta transaction costs -- so you don't see people doing either of those things very often. Instead, most people with in-the-money put options sell the contracts and don't deliver.

Answer 2

First, the put option that you excised must be in-the-money (i.e. the option strike price is higher than the stock price). Secondly, you will have stocks that you own (i.e. it will not be borrowed) and want to sell. if you don't have stocks, it seems rather meaningless to exercise as you can sold the put option for profit.

Since you need to own the stock in the first place, it will always be executed.