Options Trading Tutorial

If I buy a put option for a stock, do I need to actually own the stock in order to sell it at the strike price?

Public Comments

1. If you want to sell the shares then yes, you would need to own them. However, most traders will just sell the put in the open market and captialize on any price movements that way. For example, say you buy a $50 put for $3 and the stock falls to $45. At that point, the $50 put must be worth at least $5 (intrinsic value) otherwise arbitrage is possible. In addition to the $5 intrinsic value there will also be some time value. Let's assume it is $1 so that the put is now worth $6. You could just sell the put for $6 and close the position. You bought it for $3 and sold it for $6. Of course, you could also buy the actual stock for $45 and exercise the put to sell the shares but you'd only receive the $5 intrinsic value. The reason is that you forfeit your put upon exercise and therefore lose the time value. So you're not required to have the shares in order to trade puts!
2. No. You can exercise a put option, selling the stock, creating a short position in your account if you do not own the shares.
3. If you have a margin account and have enough equity in it, then you can exercise the option and your broker will buy shares to deliver. You will end up with a short position. Most people in this situation will just sell the put if it's in the money.
4. not, you don't but you must buy the stock later.