Any options experts out there ? Need some help !
Hey guys,
I am pretty sure there are some options experts in here. This might be a simple question for some of you experts out there. I am a beginner who is learning to trade options. I had a question regarding Deep-In-The Money options.
Suppose I am Long (bought) a put option for a stock priced at a strike price of $12 and lets assume the stock is currently trading at $11. Thus, my options as In-The-Money.
My goal is to sell to close the long puts at a higher premium. If the stock price goes down, the put premium would increase and I can profit from selling those options.
What if the stock suddenly gaps down to say $5 from $11 due to some bad news. When that happens, my options will be very Deep-In-The-Money.
The two questions I have is :
1) Since the put options will be very deep in the money, will there be anyone who will buy my put contracts. Will there be any volume at all at that strike price range ? Will I be stuck with the put options till the expiration ? I ask this because, i don't see a reason why another trader would buy my put options for such high premium and deep in the money.
2) What if I choose to exercise the options ? do I need to purchase the underlying stock at the gap down price so I can sell the underlying stocks for higher price with the help of my put contracts ? Or is there anyway I can exercise my option to sell the stock for higher price without pouring my money in it to purchase the stock only to sell it ? I don't have margin account.
Please excuse my weak knowledge on options as I am a beginner. Thanks for your time in advance !
1.) no, you will be able to sell and close your position. don't worry about that. although, if you were trading fairly illiquid options, like many are, you may take a small hit on the bid-ask spread, but I'm sure you looked at that before purchasing. but bottom line, yes, you will be able to close out of the trade. if you think about it technically, you purchased the option and someone sold it to you to begin with. it is your right to close the position, not theirs.
2.) don't exercise the put. sell it in the market. because 99.9% of the time it is worth more than what you would receive by simply exercising. i.e. if the stock dropped to $5, and your strike was $11, then you exercise and receive $6, right? the option itself should never trade below that $6 mark because of time value.
and if you truly made this trade and its not some hypothetical situation, then congrats, because you probably just made a killing.
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