Personal Finance & Money Asked by ToniAz on April 12, 2021
This question is a followup to a recent and similar question on buying a put: When a long PUT expires in-the-money, whose shares are being sold?.
Suppose I don’t have a margin account, and I buy a put to bet against a stock that I do not own (my broker allows me to buy the put as I have enough cash to pay for the premium). The put expires in the money and it is automatically exercised. Responses to the question I linked say that, in this scenario, I would be short 100 shares. But how could I be short any shares if I don’t have a margin account? Would the broker open up a margin account over the weekend on my behalf? Wouldn’t it be much easier to automatically NOT exercise the option?
It is unlikely your broker will allow you to buy such a put unless you have:
(1) a long position in the stock (to cover the put),
(2) an agreement that the broker will sell the option on expiration day if the option falls in-the-money (unlikely) or
(3) that the broker may issue contrary exercise advice at expiration on your behalf, in which case the option will not automatically be exercised.
The reason (2) is unlikely is there may be insufficient liquidity at or approaching the close to be able to sell the option, even if it is in the money.
Answered by xirt on April 12, 2021
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