Hi,

I'm a beginner when it comes to options and I need assistance with a put option. I bought an April $35 put option on a stock when the stock was $45 and the stock is now at $35. Can anyone recommend what I should do?

When does the option expire?

Is the option exercisable?

Is the settlement by delivery?

Do you have the stock with you?

Do you expect the stock to go down further?

Is your position in profit or loss?

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If you don't have the stock with you and don't expect the stock to go down further, I suggest you sell the option in the open market and book your profit/loss.

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When does the option expire? It expires the third Friday of April

Is the option exercisable? Yes it is exercisable.

Is the settlement by delivery? I don't understand this question.

Do you have the stock with you? I don't understand this question.

Do you expect the stock to go down further? Right now it's looking like it will go back up to $36 or $37, but I don't expect it to go no lower than $34.

Is your position in profit or loss? When it goes below $35 I'm in profit.

The problem is I bought the put expecting it to go down to $35, but I don't know what to do when it hits $35 or below. I'm a fan of trial and error, but there's so money on the line and I don't want to make the wrong move.

In certain markets, options are settled by delivery.

It means you can sell the stock to the option writer at $35.

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In some markets like India, options are cash-settled.

It means you get the cash difference between the strike price of your put option and stock price on the exercise day.

If you have a $35 put option and the stock is $34 on exercise day, your get $1.

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If you don't expect the stock to go down below $34, you should be selling the option when the stock touches $35.

The expiry is still a few weeks away.

At $35, there will be no "intrinsic value" in the option, but there will be a lot of "time value".

As time passes, the "time value" will decay.

Thus, selling the option is the best choice.

See this article for more about "intrinsic value" and "time value" of options.

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Hi Alchemist,

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?

Thanks,
Anthony

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.

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Gotcha. So when I sell the option, I'm selling to close correct?

Yes, that's right.

Selling the option will be closing out the position.

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Hi Alchemist,

Thanks for your quick response and insight. I now realize what I should've done was just short the stock as opposed to buying the put option as I was surely confident that the stock was going down. I would've made a lot more money and was willing to risk my investment with a stop loss. If I can use a stop loss I really don't see a point in buying basic puts.

Thanks,
Tdigs

The problem was that your put option was far "out-of-money".

The more an option is "in-the-money", the more sensitive it is to price of the underlying security.

If you had bought an "at-the-money" put option, it would have shown you a better price appreciation.

(Price appreciation is absolute terms and not percentage terms).

If you had bought an "in-the-money" put option, it would have shown you an even greater price appreciation compared to "at-the-money" and "out-of-money" put options.

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