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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1207  
Subject: Re: Options in trouble Date: 12/21/2012 5:02 PM
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jkens,

You wrote, What I am curious about is this. Lets say I sold the options for $1 and they expire in the money at $1.50.

If the stock is not put to me, and I have already collected my $1 when I first sold the puts, and they expire at $1.50, am I required to pay the .50 difference?


What are you talking about here?

From the context of your post, I assume $1 is the PREMIUM you received per share, correct?

Is the $1.50 the current premium offered for the same contract? Or is that the strike price of the underlying stock? No, I doubt that its the strike price because you usually won't find options on penny stocks. So I'm assuming you mean that on the day of the contract expiration, the option was quoted at a $1.50 PREMIUM.

If that's your question, there are three possible outcomes. To help illustrate the ramifications, lets fill in some missing numbers with ones I'll make up. Let's assume you sold 10 PUTs and the strike is $25/share.

1. You close the put contract by buying it on the market for $1.50/share. Total cost: $1,500. Total realized gain(loss): ($500) less two commissions.

2. You let it ride and the option is not exercised. Total cost $0. Total realized gain(loss): $1,000 less one commission.

3. You let it ride and the option is exercised/assigned. Total cost: $25,000. Total realized gain(loss): $1,000 less commission. Total unrealized gain(loss): ($1,500) less commission. Net gain(loss): ($500) less one commission.

The odds of scenario #2 happening probably aren't good with an ITM option. But if you have the cash on-hand, taking the chance and holding the contract might be worthwhile ... assuming the stock price doesn't tank the next day.

However with scenario #3 you have to remember that you're tying up a bunch of cash. If you don't have that cash on-hand, the broker will take the money out of your margin balance. You need to be careful about that for the usual reasons that it's rarely wise to buy a stock on margin...

BTW, I think the answer to your original question is, No. If you've sold a put, the only reason you would be asked to cough up more cash is if the stock is put to you. At that point you would pay the strike price times the number of contracts and receive the shares in exchange.

Also, It seems to me since the options are now worth more and the stock price is below my strike the stock could be put to me at any time, just curious why it hasn't been, or is that common.

A person holding an option doesn't always exercise just because it's in the money at the moment. In fact, most options traders would prefer to sell the contract to realize the gain rather than exercise before the expiration date. This is because the option holds both intrinsic and time-value and the only way to realize the time-value of the option is to sell the option to someone else. So the odds of you being assigned before the expiration date are slim because the contract holder would just sell both the put and the stock on the open market to realize a better return than exercising the put.

- Joel
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