Originally Posted by tdigs
Thanks for the quick response. So you recommend selling the option. Questions:
1. If I sell the option at $34 I will only get $1/share?
2. If that's the case, what is the point of buying a put option when I could have just shorted the stock? If I shorted the stock I would've made $10/share because it was $45 when I bought the option.
3. What do I do after I sell the option?
4. What's the difference between selling the option and exercising the option?
1. If you sell the option when the stock is at $34, you will get more than $1.
If you exercise the option when the stock is at $34, you will get only $1.
The reason is that exercising an option gives you only
the intrinsic value.
Selling the option gives you the intrinsic value + time value.
That is why I said selling the option is the better choice.
An option should be exercised only if the time value is almost 0. This happens when the option is "deep-in-the-money" or expiry is very near.
2. The advantage of an option is that there is limited risk in an option. You cannot lose more than the initial investment.
In shorting a stock, there is unlimited risk. If you short a stock at $45 and it goes to $90, you can lose $45 per share.
3. Look for another opportunity...
4. As I said earlier, exercising an option is encashing its "intrinsic value".
Selling an option is encashing its "intrinsic value" plus "time value".
Thus, if the option is liquid enough, you should always try to sell it and not exercise it.
Sometimes, when options are "deep-in-the-money" or the expiry is near, buyers hesitate to buy options.
In such cases, if there is no market for the option, the option buyer has no choice, but to exercise the option.
More about exercising options