Appreciate any reply to this scenario pending. This is generalized but applies to my situation. XYZ stock price was $4.50. Strong Sell recommendation. I buy a $3.00 Put. One contract. Stock price falls to $1.25. Low volume and zero bids for Puts at the $1.25 price point. Should I enter a stock purchase order for 100 shares at $1.25 and then exercise my Put option to sell at $3.00 - or - is there another possibility? Thanks again.
If/since the put is worth that much (actually should be worth $3 strike - $1.25 stock = $1.75), then you can sell that put at that price. Lack of bids doesn’t matter in this case as someone has to post the first bid or the first offer/ask, and it can be you. Computers should find and take your offer when it’s so good that you’re losing the remaining/extrinsic value.
How much time till expiry? Keep in mind if you buy the stock,you are now synthetically long the call.. If there is time left,do not exercise the put
Worst case scenario, you should at least be able to sell intrinsic value ($3.00 - $1.25 = $1.75) for those puts, which are now deep ITM. Don't sell them for anything less. As TaoWave points out buying 100 shares will make you synthetically long the $3.00 call, but you will have locked in $1.75 - [whatever you paid for the put] profit...and now are synthetically long the OTM $3.00 call for free. Recommendation: Since the $3.00 put is now ITM and illiquid, buy the 100 shares @ $1.25, and try and sell the more liquid OTM $3.00 call for some credit. You'll be left with long 100 shares of XYZ and short one $3.00 call, and long one $3.00 put. [Long 100 shares] + [short -1 $3.00 combo] is a riskless conversion that will cancel each other out at expiration.
%% Sounds like a real bad idea to buy that penny stock [100 or any shares]. I like to milk a trend so I like the idea of trying to close that put for$1.50/ 1.75, or [2nd choice]$1.20 monday Low volume is ok/ one more put exit should not hurt you much. Low volume can be worse for a short term trade+ I assume you can get out @ the bid prices I noted??
He's buying stock to cover the put and getting "a free call"...If he catches a put bid above parity,it's one thing,but why give the call away
Thank you all for the great replies. My thinking was that I should/could buy 100 shares at $1.25 for $125, exercise the $3.00 put to sell for $300 and pocket the $175 difference. I like the other possibilities which is what I was asking for. Thanks again.
Again,do NOT exercise the put if you buy stock... You are giving away the synthetic call you are long
By buying the shares you now have a "free call". Sell the $3.00 call for whatever you can get for it to maximize the trade. Make the $175 difference + credit for selling the "free call."