Covering puts?

[stunna]

I searched thru the forum with no luck, so here's my question....

Do you have to cover puts if the put becomes executed?

[netwrangler]

Originally Posted by stunna

I searched thru the forum with no luck, so here's my question....

Do you have to cover puts if the put becomes executed?

The quick answer is, "No."

If you sell a put, and the put is executed [assigned] you have just bought the underlying stock.

Most new options traders will not be allowed to sell 'naked' puts. Rather, they will sell Cash Secured Puts. You can follow the link to get an explanation of Cash Secured Puts from 888options.com.

If you buy a put, which is essentially make the same directional trade as shorting the stock, you make money as the stock PPS goes down because the value of the put goes up.

If, however, the PPS of the stock goes up above the strike price of the put, the put will expire worthless. You will be out the premium you paid, but you do not need to 'cover' as you would a short sale.

Most of the time, put buyers sell the put before the date the option expires [expiry]. Many traders set profit-exit orders and stop-loss orders to capture gains or limit losses as they occur.

Your question goes to one of the key differences between the short sale and the put. In a short sale, you have to 'cover' or you are on the hook for theoretically unlimited losses. When you buy a put, you are limiting your loss to the price of the premium.

Comparing return from a short sale with buying a put looks like a good subject for a post in the 'Are We Making Any Money' thread.

[stunna]

My question is related to the latter part of your explanation.

But if you buy a put and it becomes assigned, therefore, you are executing the right to sell a stock at a certain price...

How can you sell a stock w/out ever owning the stock in the first place.....

[netwrangler]

Originally Posted by stunna

My question is related to the latter part of your explanation.

But if you buy a put and it becomes assigned, therefore, you are executing the right to sell a stock at a certain price...

How can you sell a stock w/out ever owning the stock in the first place.....

Well, you can't, of course.

Some people buy 'protective' puts for stocks they already own.
For example, if you bought a stock at $30/share, and it goes up to $40/share [lucky you], you might want to buy a 'protective' put at a 35 strike price. That would mean that you would be 'protected' by being able to sell your stock at the strike price until the put expired. Note that you are the owner. If you wanted to exercise the put, YOU are the one who initiates the 'assignment'.

But if you bought a put on a stock you did not own, you would probably NOT exercise the put. That is, instead of buying the stock and exercising the put to sell the stock, you would probably just sell the put instead. [Usually, because of commissions and the time-value portion of the option premium, you come out ahead by just selling the put instead of going through the buy-exercise/sell routine.]

The real issue is figuring out when to sell the put.
There are four key factors to consider:

• The intrinsic value of the put. This is the difference between the stock price and the strike price.
• The time value of the put. This is the premium minus the intrinsic value
• The price of the stock. In particular where is the stock price in relation to its historic [or expected] trading range?
• The time left before 'expiry' — the date the option expires.

NOTE: If you don't sell your put before expiry, you lose the entire premium, even if the put had value the day before it expired.
[Some brokers have 'fail-safe' systems that will automatically sell your expiring options before they become worthless. Mine does, but I never rely on it. I prefer to maintain active control. Talk to your broker about whether they offer this feature and exactly how it works.]

I strongly recommend you plow through some of the option guides on-line and do some simulated trading before you actually commit money to options.
The Options Industry Council has some free on-line classes that start at a beginners level and go up through some advanced strategies.
BTW: Note that "buying puts" is classified as an 'intermediate' topic.
There is a great deal of free information out there. I wouldn't purchase a course before understanding the free stuff.

Hope This Helps

[wallstreetsedge]

Originally Posted by stunna

My question is related to the latter part of your explanation.

But if you buy a put and it becomes assigned, therefore, you are executing the right to sell a stock at a certain price...

How can you sell a stock w/out ever owning the stock in the first place.....

actually..

if you are short a put and it gets executed... your account will show you as being short on the stock position and you will have to buy the stock to cover the position

however, if today happened to be option expiration day and someone decided to execute, 1 of 2 things might happen.. the first is what i mentioned above. the 2nd is that the brokerage firm will automatically close the position for you by buying back put