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What happens if I write a put & I already own the underlying common shares?



Asked by Bella, Last updated: Nov 12, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

If i buy a put from you, i have purchased an option that allows me to sell shares to youat the exercise price. what this does for me is establish a short sale position. sinceyou sold me a put option, you are obligated to buy those shares from me.lets say i buy a put option on abc stock. the put option i bought has a strike price of$20 and abc is currently trading at $30. you are the seller of the put option and sold itto me at a price of $1.25. lets say a few weeks later, the price of abc stock is nowtrading at only $10. that means i get to sell you shares at $20 per share even thoughthe shares in the market are currently trading at $10. so not only did you already ownshares that have dropped in price to $10, you now have to buy from me more sharesand pay $20. the end result is youll be left with more shares than you started withand the shares are all worth $10.my exercising the put option is a case of me having the right to sell you shares, andyou having an obligation to buy the shares that i am selling you.
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