This might sound like a basic question but I am a newbie so go easy on me. I sold a put credit option(L.TO) a few weeks ago. The expiry date is June 17th, so in 23 days. The strike price for the short put is 115 and 110 for the buy put. The underlying as of today is CAD 114. The credit received is $1.88. My question is why does my P&L still show -CAD109? I was hoping to close the trade in 2 days (as per the TastyTrade rules) but I'm hesitant to close a profitable trade with a loss. Similiar trades with the same DTE show a profit while this one is underwater. Why is this? Also, does it make more sense to wait closer to exp. to gain the profit? Thanks.
Short Put Credit Question
- Thread starter etihan
- Start date
Because you are losing money right now on the short put due to your short put being ITM (In the Money) meaning that its strike is higher than the underlying's price. I hope you at least understand what's a put and understand why you are losing money on the short put? And since there are still 23 days to go until it expires, any time when there is still time left before an option expires, its option price is higher than the difference between its strike and the underlying price called intrinsic value and this is why you are losing more money than just the difference between the option's strike price and the underlying's actual price.
If you wait until its expiration, you run the risk of the underlying going further down potentially impacting your account margin because this option is an American option meaning that it can be exercised against you at any time before its expiration date for you to be on the hook to buy the actual shares at the strike on the short put for $115 when the actual underlying could be a lot lower. Depending on your broker, you could be force-liquidated and/or facing a margin call. Of course there is a chance that the underlying will not deteriorate further and actually gain in value and the position ends up in profit or by worst facing a maximum loss of $5, difference between the strike on the short put and the long put (115-110). But given that there are still 23 days, almost a month left, anything can happen. Everything will depend on how volatile the stock is and whether there are any extraordinary events anywhere between now and the expiration date of the option and the future direction of the underlying.
Yes as long as you are short an option, you are obligated to buy the shares any time when the underlying's price is below the strike on the short put. And it's not your broker forcing you; it's your obligation as an option seller under the option contract. The options that you just bought and sold are contracts that carry their respective rights (exercisable at your discretion) and obligations. The only other way that you might not have ended up with the underlying is if the underlying falls so much that its price is below your long put's strike. Then if you are on auto-exericse (by default), as soon as you have bought the shares, you will have turned around and sold the shares right away by exercising your long put thus ending up with a loss of $5 per contract. Since each contract is 100 shares, $5 per contract will land you a loss of $5 X 100 = $500.
Most times you won't get exercised (stock put to you) unless there's almost no premium (extrinsic value) in the short option.
If the stock price is 114 then the 115 Put has an intrinsic value of 1.
If the current price of the 115 Put is greater than ~1.10 (stock @ exactly 114) then you likely won't get the stock put to you.
Compare the intrinsic value of the Put to the Put price as you approach expiration.
***These numbers (.00-.10) are just estimates based upon the price of the stock(114). Larger stock prices could get exercised with .10-.20 as it's a smaller % of the price. Option liquidity (poor spreads) could also have an influence on time of exercise.