Options Trading Tutorial

If I sell a put, strike price $150 and the price falls below $150, what is likely to happen?

Is there a good chance that the put will be exercised before expiration?

Public Comments

1. Depending on how much lower the underlying asset will go. If the underlying asset price fall below 150, it is considered in the money. This also depends on what type of option you have: american, european, asian, burmuda, american- asian, etc.
2. <<<Is there a good chance that the put will be exercised before expiration?>>> Sometimes, assuming it is an American-style settlement option. (All listed options on individual stocks in the Untied States are American-style, meaning they can be exercised any time prior to expiration.) Assuming the underlying is a stock, the way to tell if an in-the-money put option is likely to exercised early is to look at the stock price and the bid quote for the option. If the bid quote for the option is greater than the difference between the strke price and the stock price, there is very little chance of the option being exercised early. Example: Strike price = $150 Stock price = $140 Option bid quote = $12.00 If the option holder exercised the option he would receive $15,000 for 100 shares of stock and 1 option contract. If he sold the stock and the option separately, he would get $14,000 for the stock and $1,200 for the option, for a total of $15,200. Most people, given the choice of selling something for $15,000 or selling the same thing for $15,200, would prefer to sell it for $15,200. On the other hand, If the bid quote for the option is less than the difference between the strke price and the stock price, there is good chance of the option being exercised early.
3. A quicker way to figure out if the option is likely to be exercised is to look at the price of the $150 Call option. When that option closes at $0.05 for several days your put is likely to be exercised.