Naked long puts

[Eliot Hosewater]

Does it ever happen that puts that expire ITM don't get assigned because the owner was "naked" at the time (i.e. didn't own the stock) and it is "hard to borrow"?

I'm thinking of a stock like OSTK or NFI that is already heavily shorted and some brokers can't even borrow the shares to short. I think the term is FTD - Failure To Deliver.

 

[Arnie Guitar]

I can't imagine it happening.
You will have to meet your obligation.

 

[cnms2]

What do you mean by "naked long"? I understand "naked short", and I understand "long" ...

 

[GoldmanSax]

huh? what chu talkin' bout willis?

if ur long the puts and they are in the money at expiration and u don't own the stock, u can sell the option.

why would u choose not to exercise? and let it expire worthless? and what does a "hard to borrow" stock have to do with this? u dont need to borrow stock cuz u can buy it in the open market.

 

[Eliot Hosewater]

Quote from cnms2:

What do you mean by "naked long"? I understand "naked short", and I understand "long" ...

That's why I put it in quotes. You are long a put that gets exercised, but you don't own the stock. Maybe you assumed it would expire worthless but popped into the money on at expiration, so you would be short the stock come Monday morning.

I was reading on 21centuryinvestoreducation.com about how you can lose more than your premium if you buy a call. You assume it will expire worthless but it pops right at the end. So you just bought the stock. Then over the weekend bad news comes out about the company and the stock gaps down on Monday morning.

I was wondering about the put side of a situation like that.

 

[MTE]

Quote from Eliot Hosewater:

Does it ever happen that puts that expire ITM don't get assigned because the owner was "naked" at the time (i.e. didn't own the stock) and it is "hard to borrow"?

I'm thinking of a stock like OSTK or NFI that is already heavily shorted and some brokers can't even borrow the shares to short. I think the term is FTD - Failure To Deliver.

The option will be exercised, but the clearing firm will force you to close the short stock position - a forced buy-in.

 

[MTE]

Quote from Eliot Hosewater:

That's why I put it in quotes. You are long a put that gets exercised, but you don't own the stock. Maybe you assumed it would expire worthless but popped into the money on at expiration, so you would be short the stock come Monday morning.

I was reading on 21centuryinvestoreducation.com about how you can lose more than your premium if you buy a call. You assume it will expire worthless but it pops right at the end. So you just bought the stock. Then over the weekend bad news comes out about the company and the stock gaps down on Monday morning.

I was wondering about the put side of a situation like that.

You got two fairly unrelated questions going there. First you asked about "hard to borrow" stock and short position resulting from exercise. Now, you are asking about the weekend risk.

Sure, if you let the option go through exercise and end up with long/short stock position then you assume weekend risk, i.e. the risk of the stock gapping against you on Monday.

 

[Eliot Hosewater]

Quote from MTE:

You got two fairly unrelated questions going there. First you asked about "hard to borrow" stock and short position resulting from exercise. Now, you are asking about the weekend risk.

Sure, if you let the option go through exercise and end up with long/short stock position then you assume weekend risk, i.e. the risk of the stock gapping against you on Monday.

Seems some people had some trouble with the first part of the original question, so I had to spell it out.

My original question was what would happen to the put writer if the shares couldn't be delivered?

 

[MTE]

Quote from Eliot Hosewater:

Seems some people had some trouble with the first part of the original question, so I had to spell it out.

My original question was what would happen to the put writer if the shares couldn't be delivered?

Nothing, the put writer will be put the stock, while the put buyer will be forced to buy in. So, essentially, the put buyer will buy the stock for the writer.

In other words, the clearing house will force the put buyer to buy the stock in the market so that it can be delivered on the put option exercise.

 

[Eliot Hosewater]

Quote from MTE:

Nothing, the put writer will be put the stock, while the put buyer will be forced to buy in. So, essentially, the put buyer will buy the stock for the writer.

In other words, the clearing house will force the put buyer to buy the stock in the market so that it can be delivered on the put option exercise.

OK, thanks, I was getting hung up on the put buyer being short the stock. So the put buyer could also lose in this case if the stock gaps up on Monday.