Long Put ITM Instead of Shorting the Underlying

[tucciotrader 10]

Hi,

 

I was wondering if the following may sound fine to you as a way to go short on a stock. Suppose XYZ is trading at 12,50$ I will buy a put strike 13.00 expiring in december and the premium I pay for that options accounts for the max risk I may encouter. Now, the break-even-point is around 12. If the underlying reaches 11 or so I can buy the underlying at that price and then sell it right away thru the put options...can this actually be done?

 

What If I sold the put option when the underlying is trading at 11 instead of going about like above?

 

thanks

[SIUYA 11]

"I can buy the underlying at that price and then sell it right away thru the put options...can this actually be done?"

 

Yes it can be done..... but why would you do that?

(I leave that as an open question for you to answer as a learning exercise as you practically answered it yourself with your next comment)

[tucciotrader 10]

"I can buy the underlying at that price and then sell it right away thru the put options...can this actually be done?"

 

Yes it can be done..... but why would you do that?

(I leave that as an open question for you to answer as a learning exercise as you practically answered it yourself with your next comment)

 

Well...why not? who ever would buy a deeply ITM option near the expiration date? Also, Market Makers could provide a large spread so that I don'y really capitalize on that...

[SIUYA 11]

and your broker and the exchanges charge you nothing?

 

You need to look at what the most cost effective solution is in each case. Sometimes the market makers spread may not be that large, but if it is then yes, you may save on this spread. I also thought in this example that you are long the option and looking to sell it out. Most market making firms will do this at parity (or maybe a small spread) if not maybe I should look to start becoming a market maker again.!!

You dont necessarily have to hit the market spread, you can put a limit order in.

 

People who are short an option will buy an ITM option back.

There are plenty of people who cannot fund the actual purchase of the shares.

 

you can do either solution, so long as you are able to via funding the trade and then yes pick the most cost effective solution.

[tucciotrader 10]

Well, I can always buy the underlying using the leverage then I'll be able to sell the underlying thru the put option...

[Nick1984 10]

Don't forget that when you exercise an option you give up your time value.

When you are long an option the closer to expiry the faster the time value decays.

Keep in mind that you actually pay for your time value when you purchase your option.

 

The time value of a put will decay at a slower rate than a call however.

 

Also as SIUYA stated there are other costs involved in the exercise of your option.