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I am very new to options, and was wondering about a scenario to generate income based on speculative price movement in the future.

For example:

  • SP-500 ETF currently trading at $200
  • Speculate that SP-500 ETF will trade at $180 within two months

Questions:

  • Is it possible to purchase the put option with the intent to sell the option if the strike price does execute (thereby making margin gain of selling the option at a higher price).

  • Is this considered a naked put?

  • Would I have to purchase the underlying security in the option if SP-500 ETF does not hit the strike price within the option time period?

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Buying a naked put is an outdated description from decades ago. You're buying a put either to open a long put position or to close an existing short position. A naked put is one that has been shorted and is not covered.

When you own a long option, you have the right to exercise it. You cannot be forced to purchase the underlying security. The only time that this is not true is at expiration. If it is one cent or more ITM at expiration, the OCC will automatically exercise options whether they are long or short. This is called Exercise by Exception. If you are long the option, you can designate to the OCC via your broker that it is not be auto exercised at expiration. This would make sense if it is ITM by pennies and your commission and/or fees to close the position exceeds the ITM amount.

Apart from the above, you can sell-to-close your long put at any time before expiration. If it is worth more than you paid for it, you'll realize a gain.

| improve this answer | |
  • "If it is one cent or more ITM at expiration, the OCC will automatically exercise options" Does that mean that I would be required to purchase the underlying security? – Kyle Jun 14 at 21:47
  • No, you would have to sell the underlying (go short or close an existing long share position). So either sell-to-close the put or designate to your broker that it not be auto exercised. – Bob Baerker Jun 14 at 21:55

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