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I am trying to get into investing and have some questions about options.

  1. If I buy a put option (which would be an option to sell stocks as far as I understood), who will provide the stocks to sell if I decide to exercise it? Should I have/provide the stocks or is it the option writer who provides them? And at what price would they be provided?

  2. If I choose to sell back the option to the writer, which I understood is called a buy to close, is the writer obligated to buy it back? Or can they say no, in which case I would have to wait until expiry?

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    Welcome to Money.SE. One just beginning to invest doesn’t start with options. In fact, most investors who have a successful lifetime towards retirement have never bought an option (or sold one) in their life. – JTP - Apologise to Monica Feb 7 at 19:42
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    If you are selling an option to close the position that would be 'sell to close' – quid Feb 7 at 19:59
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    @JTP-ApologisetoMonica thanks for the advice. What would they have baught? ETFs? Indexes? Stocks also or never? – Can't Tell Feb 8 at 9:12
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    +1 to JTP. Options are highly numerical and require a strong mathematical background just to understand how insanely expensive a bet they tend to be. You would be better off "investing" your money at a blackjack table in Las Vegas if you don't understand the maths. – Aron Feb 8 at 10:07
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    As a beginner it is advised to start out with low-cost funds, ideally being based on a big cross-sectoral index such as the S&P500 or MSCI world. The main reason being that they provide in-built diversification across a large portfolio of shares. This is everything you need for a retirement fund. If you want to go further - just for the fun of it - start stock picking with well established companies. Compare your own performance to the index funds. The secret to a private investor is investing regularly through a monthly plan, everything else is just a bonus done for fun – Manziel Feb 8 at 10:11
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If I buy a put option (which would be an option to sell stocks as far as I understood), who will provide the stocks to sell if I decide to exercise it? Should I have/provide the stocks or is it the option writer who provides them? And at what price would they be provided?

A put gives the owner the right to sell the stock at the strike price. If you exercise your long put, you must deliver the shares if you own them. If you do not own them then if the shares are borrowable, your broker will borrow them from a 3rd party and give them to you for delivery. This is called shorting.

To short, you will need a margin account, approval for shorting and the necessary margin to support the position (not a good idea for anyone other than an experienced trader). In order to close the short position, you will have to buy the shares to return them to the lender.

If the shares are non borrowable, you'll have to buy the shares immediately in order to deliver them and fulfill your exercise. Note that it usually makes more sense to sell the put, unless you actually want to go short.

If I choose to sell back the option to the writer, which I understood is called a buy to close, is the writer obligated to buy it back? Or can they say no, in which case I would have to wait until expiry?

Selling your long put is called sell to close. Though possible, it would be highly unlikely that your counterparty would be the original writer.

Like stocks, options have market makers who are required to trade at their quoted prices. Traders can place orders at higher bids and lower asks, becoming the market. Either way, you will be able to close your position.

Some unsolicited advice? Read a few option books before you dive into option trading. You're likely to save yourself a lot of money if you do so.

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    More unsolicited advice: Do not ever throw "a lot of money" at an instrument you barely understand or aren't experienced with. Applies to anything, derivatives, cryptocurrencies, leverage, shorts… – TooTea Feb 8 at 8:57
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    Thanks Bob and @TooTea for the advice. I will probably not spend too much money on options. Just trying to understand the mechanics – Can't Tell Feb 8 at 9:14
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    More more unsolicited advice. Don't throw any money at Options without a numerate degree and familiarity with Partial Differential Equations. Also, most options these days aren't settled by delivery. Heck, most options aren't even settled, as that would be a waste of time value... – Aron Feb 8 at 10:00
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    You don't need a "numerate degree and familiarity with Partial Differential Equations" to succeed with options. You need strong arithmetic skills but advanced math is for the quants. Less than 10% of options are settled, aka exercised with about 70% closed before expiration. – Bob Baerker Feb 8 at 14:10
  • I'm confused because exercising a put option is not the same as shorting. When you exercise a put option, if you don't have the shares, you buy (not borrow) them on the open market, then force the party who sold you the put option to buy them from you. Then they permanently have those shares (at least until they sell them). – stannius Feb 8 at 18:17
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Suppose you buy a put at a strike price of $32. Then you're betting that the price will go below $32, and the writer of the option is betting that the price will stay at or above $32. If the price goes to $30, then the writer of the put is down $2. The simplest resolution is for the writer to just buy the put back from you and eat the $2 loss. You can also find someone else to buy the option. Or you can actually buy a share, then use the option to force the writer of the put to buy it for $32. Technically, the writer can refuse a buy to close and force you to have a share to exercise the option. If they do this and you can't get your hands on a share for some reason, then you won't be able to exercise the option. But generally speaking it's possible to just sell the option either to the writer or someone else (put options are mostly fungible, so a buy to close versus just selling it on the market probably won't be distinguishable from your end).

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    The simplest resolution is for the writer to just buy the put back from you and eat the $2 loss. It would be more accurate if you accounted for the premium received for writing the put. Also, you'd buy 100 shares not 'a share'. Your last sentence is funky as well (buy to close versus just selling it?). – Bob Baerker Feb 8 at 3:37

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