Selling puts

[fogut]

It is very critical to know that if the stock were to go below the strike price "before the expiration day", it may not mean anything. In other words, everything typically hinges on the price of the stock the day of expiration.

It makes sense that the option buyer would want to take advantage of his right to hold off on the decision until the expiration. Since I have not done this kind of a trade, I am not sure what happens.

Worst case scenario : If you are short the stock and if it starts going up, you take a loss and decide to exit. Then it starts falling again and go below your strike price and you are either stuck with buying the puts at a lower price or get exercised the stock. Is this correct ?

Thanks a lot for your help.

 

[dagnyt]

Quote from fogut:

Since I have not done this kind of a trade, I am not sure what happens.

Nothing happens. Your position is unchanged, unless YOU take action. You remain short stock and short puts.

The only other time something happens occurs if you are assigned an exercise notice. If that happens, your stock (100 shares per put) and options disappear from your account. $6,500 per put also disappears - as that's your cost for buying stock.

Worst case scenario : If you are short the stock and if it starts going up, you take a loss and decide to exit.

Then it starts falling again and go below your strike price and you are either stuck with buying the puts at a lower price or get exercised the stock. Is this correct ?

Yes. It's correct and FOOLISH. When you decide to buy in your stock, that's the appropriate time to buy back the puts you sold earlier. Too much risk to hold them, hoping for a small gain to offset part of your loss.

Mark