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I purchased seven May 8th $83 put contracts for 88 cents each for a cost of $616. The current market value is $88. From what I understand, that is out-of-the-money and I would not want to sell because I would be losing money, correct?

Do I just let them expire? Is my premium the $616 that I will be out at expiration? Should I sell it before it expires?

Can I be forced to pay the full price of $58k for all 700 shares? If not, what is the worst case scenario?

I did not understand what I was getting into when I bought this so lesson learned the hard way.

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that is out of the money and I would not want to sell because I would be loosing money, correct?

If the options are worth less than they what you paid for them, then yes you will have a loss overall. But the premium is a sunk cost, meaning there's no way to reverse that - so the only factor in your decision is the price of the options today.

Do I just let it expire?

If they expire out-of-the-money, you will get nothing and be out the premium you paid (but no more).

Is my premium the $616 that I will be out at expiration?

Well you're already out the premium - you won't pay it again when the options expire. But yes that will be your total loss.

Can I be forced to pay the full price for all 700 shares, $58k or what is the worst case scenario?

Well, you bought puts so you're not forced to buy anything. You have the option of selling the stock for $83 (which would mean you'd have to buy them at market price if you don't already own them). If the stock is above $84, there'e no reason to buy them for more just to sell them for $83, so you would not exercise your option.

what is the worst case scenario?

The worst case scenario when buying options is the premium you pay. You've already paid it, so there's no way that you can lose any more money.

So your choices are: sell now to get something back and accept the loss (possibly rolling into another contract), or hold and take the chance that the stock drops in the next 3 days. There's no way to know which is the correct choice.

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  • At what point would you sell if it starts to drop and you are in the money? – Kristy Dunn May 5 at 19:44
  • There's not a magic number at which to sell. Options always have some time premium above their intrinsic value (strike - spot price for puts). You sell when you think the price of the stock won't drop any more or when you've reached your return goal. Or, if you don't have a clue, you could just get out now and not take any more risk with what value the options have left. – D Stanley May 5 at 21:18
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Just a small addition to the response of Stanley, who is absolutely right. In case of options the only thing you can lose is the premium you pay for it. Basically when you buy a put option, you buy a right to sell the underlying asset on the agreed price. Obviously you would only want to exercise the option when the market price is below the strike (the option is in-the-money). When the market price is higher than the strike (in your case 83$) you would not want to exercise the option, since that would only increase your loss. Thus, you don’t really have choices here, the best is to let it expire.

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  • For booking gains, sale of the option is preferable over exercise unless the option is ITM and is trading at a discount (the bid is less than the intrinsic value). – Bob Baerker May 5 at 17:49
  • At what point would you sell if it starts to drop and you are in the money? – Kristy Dunn May 5 at 19:46
  • There's no one size fits all answer to that. For a non scientific answer, I ask myself how much money am I willing to give back before I get really ticked off that I gave it back? IOW, it's equivalent to a mental stop loss order. For something more tangible... never let a nice gain turn into a loss. And if I thought that the trend might continue but didn't want to risk it all, I'd sell off enough of the position to recoup the cost of the investment or roll the call up (or put down) to achieve the same. – Bob Baerker May 6 at 0:04
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The easiest way to thing of options is that they give you a right. A call option is a right to buy at a certain price, before a certain date. A put option is a right to sell at a certain price at a certain date. These rights are independent of the stock, but the price of the stock has a big impact on the value of the options.

I purchased seven May 8th $83 put contracts for 88 cents each for a cost of $616. The current market value is $88.

You now have the right to sell 700 shares of the security at $83, any day prior to and including the expiration date.

From what I understand, that is out-of-the-money and I would not want to sell because I would be losing money, correct?

Really what matters is the market price of the option. Options are generally cheaper:

  • The more out-of-the-money they are;
  • The closer they are to expiration; or
  • The less volatile the stock is, or the less volatile the market thinks the stock will be.

Another way to think of it is that the likelihood that you could make a profit from the option is decreasing if any of the above things happen.

However, it is possible that the stock could move either making the stock more in-the-money or become more volatile (causing option prices to increase).

Do I just let them expire? Is my premium the $616 that I will be out at expiration? Should I sell it before it expires?

If you don't want your option position, you would be better to sell it sooner than later, but you need not place a market order or sell them at the market price. You can place a limit order at a price closer to what you paid, and steadily decrease it. If you let it expire, and it expires out-of-the-money then it will be worth zero. You are already out the premium, but you might be able to get some of it back.

Can I be forced to pay the full price of $58k for all 700 shares? If not, what is the worst case scenario?

If the option expires in-the-money you can choose to exercise the option. This will happen automatically unless you instruct your broker not to. This is usually profitable, because you would be selling the stock for more than the market price on expiration day. But if you don't have the stock, you might be better off trying to sell the option in the market prior to expiration.

At what point would you sell if it starts to drop and you are in the money?

It is the same as if you held a stock and the stock price went up - when do you sell? If you want to just get out of the position, sell at break-even (your original cost + transaction fees), or if you want to make a small profit, sell it a little higher, but less likely to do the trade. You could sell some at a lower price and some at a higher price.

I did not understand what I was getting into when I bought this so lesson learned the hard way.

In that case, try to sell it at break-even, and if you are not filled decrease your price slowly until the position is closed. Each day that goes by the option will be worth less and less. You can sometimes "roll-over" your position, which means you are exchanging a short term option for a longer one, but I would suggest getting to understand options more before doing another trade (which this would be).

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