hello i have 70 shares of a stock. i want to buy a put to protect against downside loss (avoid a gap down). can i exercise the put and assign someone 70 shares? the puts are in increments of 100. thank you
thanks. is that bad? can I immediately buy the 30 shares to close out? what would the effect of that be?
Try reducing your position size if you are in need of a hedge in case of a gap down. If you have a directional bias I don't see the point of reducing your delta on that position when the risk can be eliminated by trading smaller. Unless you are good at timing it. Not to mention there are transaction costs that should be taken into account. Also you don't need to exercise for a option hedge to be effective. You can sell the long put option before expiry in the event of a gap down to realize profit (if there is any) and offset losses from common shares. I'd say look more into option Greeks and their characteristics to see if they fit your need in this scenario. Sometimes options can still lose money even when the underlying direction is in favor of that option.
Agree with SmallFry that the cheapest way to reduce risk is to reduce your position size. Assuming that your account is large enough and you plan to hold the option until expiration, if you want to get out of the stock, then you could simply buy 30 more shares and exercise the put. Your profit would be the delta between put price and market price as tom pointed out. Although you might be better off selling the put and the shares.