"How Are Long Puts Assigned?"

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"How Are Long Puts Assigned??"

"How is it possible to have long put option be assigned? (Is it due to the fact that holder did not own the underlying and auto-exercise was performed when option was ITM by $0.01?)"
- Asked By Gaurav on 10 January 2016

Answered by Mr. OppiE

Hi Gaurav,

Every In The Money option (ITM Options) that you hold, whether long call, long put, short call or short put, are subject to auto-exercise not only when an option expires In The Money but also at anytime running up to expiration with chances of being assigned increasing the more in the money and closer to expiration the position gets.

So, how then can a long put position be assigned when the holder do not own the underlying stock?

When you buy a put option, which is a long put option, you are buying the right to sell the underlying stock to the writer of that option, which is the one who sold the option to you. So, if you do not own the underlying stock, what do you have to sell to the writer of that option if the option gets auto-exercised?

Now, there are actually two possible positions that you can hold for a stock; Long stock and Short stock. A Long stock position is the stock you get when you buy stocks whereas a short stock position is what you get you short sell a stock without first owning it. This is achieved through borrowing the stock from the broker and then selling it to the buyer of that stock. This Short Stock position is what you will get if your long puts get assigned in the money. So you will get the short stock position and the cash resulting from selling those stocks. Good thing is that the short stock position would have been shorted at the strike price of the put options. So, it retains the profits already made by the put options if you bought those put options when they were still out of the money.

How Are Long Puts Assigned? Assuming you are holding 1 contract of ABC's January $190 put options when ABC was trading at $190. Assuming price of ABC drops to $170 prior to expiration and your ABC long puts were auto-exercised. Profit of put options before exercise : Strike price - stock price = $190 - $170 = $20 (options premium not included for ease of illustration) You will now hold 100 short stock position of ABC shares shorted at $190 and $19000 in cash (190 x 100). Since the price of ABC is now $170, it is already in $20 profit, which is the same profit you have already made with the put options when the price of ABC dropped from $190 to $170. You will have to buy back those stocks for $170 x 100 = $17000 in order to cash in the difference of $20 x 100 = $2000 in profit.

In conclusion, it is possible for your in the money long put options to be auto-exercised and be assigned with a short position in the shares of the underlying stock.