Can someone explain me in practice how a put option is exercised? Let's say you bought a put option at 30 $ strike price, underlying now is at 20$ and you exercise your put. What happens? So you buy the shares at 30 $ or at 20 $? I don't understand this concept how you profit from it in reality. I think you buy the shares at 30 $ but how can you sell then if the underlying is at 20 $? I know you have a profit when you exercise your put in this case but how does it happen in detail? TIA
well my english sucks but i'll try to explain when you buy Apple put option at 30$ strike price - at that moment you SELL apple stock for 30$ per share when the expiration date comes, you as a put option buyer have the RIGHT (if you want to) to BUY those shares back. So if apple is at 20$ you as an option buyer have the right to BUY apple for 20$ now. so what happens is - you first SOLD apple for 30$ per share, and then BOUGHT apple for 20$, making 10$ profit per share i hope that helps a bit because i don't know how to explain in more details and more clearly edit: okay now as i read it i see that I completely f*cked up my explanation, will try to rewrite it now
Huh? Just sell the option and you'll get the intrinsic value of $10 plus any time premium on it. If you exercise it, you basically have an open position of being short the stock at $30. To close it it you need to cover the short by buying the stock at $20. Good trade btw on your part.
When you buy a put you buy the right to "put" your stock to the counter-party of the contract. Say you own 1 put at 30 strike and 100 shares of the corresponding underlying. When you exercise at 20 you get to put the 100 shares to the counter-party at 30. As vanzandt pointed out if you don't own the shares then you would end up *short* 100 shares of the underlying. Probably not what you want. Just sell to close the put and pocket the profit.
Yes but that's my point, I want to exercise the put option because the real value in shares is much bigger with the % I'm profitable than if I just sell to close for more % but lesser real value... So if I exercise my put option I'm in fact shorting the stock after I exercised it? If I exercise for let's say 30% on 9000$, my profit is 2700$. If I sell to close I'll maybe have a triple on like 400$ (premium paid) and that's only 1200$, so exercising is better here I think.
I don't understand the difference between selling and buying. I'm confused with buying the shares or selling the option. That's why I'm asking the question. I have never exercised an option with my broker so I want to make sure I know what I'm doing.
When you exercise a put you are putting 100 shares of the underlying to the counter-party at the strike price. Period. If you don't have shares in your account you have to borrow them (i.e. go short) to deliver to the counter-party. You'll end up short 100 shares.
ok so in fact you have to buy shares (100, if you have 1 option contract) completely separate from the put option like you normally would buy shares from a stock at the underlying price. Then you exercise your put option and the counterperson has the obligation to buy your shares at the strike price of the option. If you do it like this, in this case you end up not being short?
Yes. Remember that the real purpose of a put is insurance on a long stock position. You buy 100 ABC at $100 and you simultaneously buy a 100 strike put for $1 (net debit $100) ABC falls to $90 so you lost $1000 on the stock but gained $1000 on the put minus the $100 debit (insurance premium). If you exercise the put you force the counter-party to buy your 100 ABC shares for $100. The put and the 100 ABC are now gone from your account. Your net loss is $100.