Options Trading Tutorial

Stock Options Trading - Basic Q?

I am new to this. Assuming I am exercising a 'put' option, should I - Buy the shares at the current market price and sell it to option buyer for the strike price? If thats the case, I might have to pay commission/transaction charges for buying the stocks? How does this particular thing work? Thx.

Public Comments

1. If you sold someone a put of XYZ at 50 just go back and buy a put of XYZ at 50 to close the position. You will realize a gain or a loss depending on which direction the underlying security moved. Your question appears to be contradictory. If you sold someone a put then they have the right to sell you their stock at the strike price during the life of the options contract. Why would you be buying the stock to sell to him? I hope you are not playing with real money. If so can you say "valuable learning experience"? The sharks will eat you alive. Good Luck
2. It would probably be simpler for you to simply purchase an offsetting contract to close out the position--you don't need to actually excercise the contract.
3. I can't think of any good reason to exercise a put option unless you already own the stock and want to get rid of it. Just sell the put option to close your position. Then you only have to pay one commission - on the sale of the put. If you do what you're talking about, you have to pay a commission to buy the stock and then another to exercise the put - and at many brokers, the commission to exercise an option is higher than for buying/selling stock and options, so I think you're just wasting money doing it that way. Oh, and don't let the first answer confuse you. I think he misunderstood your question. If you're going to exercise a put, that means you BOUGHT it, not that you sold it to someone else. I do agree though that options are risky and most people lose money, especially the buyers of options. It's easier to make money selling options (because time works in your favor instead of against you). If the stock moves the right way...or does nothing...or even moves the wrong way but only a little bit, you can make money. When you buy options, the stock has to move the right way far enough to more than cover the premium and do it before the expiration date. So there's a lot more that has to happen to make that profitable. But if you sell calls, be sure they're COVERED calls (meaning you own the stock needed to satisfy the call)...otherwise you have unlimited risk and can lose a lot of money if the company gets bought out, announces a cure for cancer, etc. and shoots way up.
4. An Australian by the name of Jamie McIntrye teaches all about investing in options. You can download his free book at http://www.thewealthage.com - its an easy read. You still may be able to request his DVD for free too, check out the web site for more info.