Exercising put option question

R

roontoon

I have a question. I have bought put contracts from time to time but I find myself in a situation where I might want to exercise the contracts that I have. I have 12 contracts for RIMM at 15 due in jan 13. If I exercise them am I correct in my thinking that I would get the difference between the price of RIMM at the time I purchased them (21.57) and the price of RIMM today (12.57) or $9 per share times 1200 shares. This would be significantly more than the current value of the contracts. Thanks for helping a novice.

d
 
As the owner of the PUT you have the right to put the stock (sell) at the strike price. That's all. It is only to your advantage to exercise if the underlying stock is below the strike. If you own the underlying you sell at the strike or if not you would sell short. (assuming the stock can be barrowed). If short you assume the risk of that position.
 
Quote from stoic:

As the owner of the PUT you have the right to put the stock (sell) at the strike price. That's all. It is only to your advantage to exercise if the underlying stock is below the strike. If you own the underlying you sell at the strike or if not you would sell short. (assuming the stock can be barrowed). If short you assume the risk of that position.
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If a stock on which someone has a put is a hard to borrow stock, could there be a situation where the put owner cannot exercise his put?

When exercising a put you own (assuming that you do not owning the stock prior to exercising) do you need to actually borrow the stock in order to short it? I assume that since the put itself gives you a contractual right to sell the stock at any time (whether sell to close or sell to open) it is not relevant if you can actually borrow the stock in order to short it.

It should be noted that I am not familiar with such process so please correct me if I am wrong, thanks.
 
dragonman,

I think you can exercise a put on a hard to borrow stock and technically be a naked short, but the clearing firm would buy you in pretty quickly at that point and who knows what price you'd get assigned on the buy in. That's just what my broker told me one time.

--Bob
 
If you own a put contract, this gives you the right to sell shares in the underlying stock at a specific price. Since you own 12 puts with a strike price of $15, you could sell 1200 RIMM shares for $15 per share. If you already owned 1200 shares in RIMM (that is before exercise), you would have than sold all your shares for $15 each. If you don't own them before exercise, you would then be short 1200 shares. you could then cover by buying them at the current market price and make the difference between the current price and 15 multiplied by 1200 shares. Currently, the price is (at the close today) 13.78 per share. Right now, if you exercised, you would get 1.22 per share using the methods outlined above. However, the Jan 2013 15 put is currently valued at 3.22 so you would be better off selling it directly.
 
it's extremely important to realize there are very very (!) few circumstances in which exercising an option early ever makes any sense.
 
Quote from roontoon:

I have a question. I have bought put contracts from time to time but I find myself in a situation where I might want to exercise the contracts that I have. I have 12 contracts for RIMM at 15 due in jan 13. If I exercise them am I correct in my thinking that I would get the difference between the price of RIMM at the time I purchased them (21.57) and the price of RIMM today (12.57) or $9 per share times 1200 shares. This would be significantly more than the current value of the contracts. Thanks for helping a novice.

d
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if there is value in the call, you are usually better off selling the put. if you want to be short, sell the put and sell stock. since your puts are 1 year out, you would not want to exercise them at all.
 
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