As a put option buyer, do I potentially suffer a loss higher than the premium if I forgot to close the option when it is in the money

Question

Many sources only mention that if the option expires worthless, I will lose the premium as the maximum loss. But in reality, I can also lose money higher than the max loss even if my put option is in the money if I forgot to sell it before it expires? Consider the following case:

For example the stock was at $110 when I bought a strike price 100 put option at a cost of $4. That means I already paid $400 for the premium.

Let's say someone invited me to a party on the last Friday of the month, and the stock price dropped to $99 as it expires. Since it is in the money, my broker will automatically exercises it for me when it expires.

Since I don't own any stock, I have to buy 100 shares of stocks. Also my put option is exercised after the market closed, I might not be able to buy it at $99. If on Monday, the stock price rises to $110, does that mean I need to buy it at $110, and sell it to the put seller at $100?

In summary, I lose $1000 selling the stock at $100, and paid $400 for the premium, so I am at a loss of $1400. And since I am using margin to buy and sell stocks, I guess the broker will also charge me fees for that.

Therefore, as a put option buyer, my loss can exceed the theoretical maximum loss if I am careless?

Answer 1

An in the money option will be exercised at expiration. In your case, you would find yourself short 100 shares.

At that moment, you sold 100 shares for $100 (each share) and the stock can be bought for $98. You've recouped $200 of your $400 cost, but lost $200.

By not completely closing out the position and actually covering, you are at risk should the stock open up Monday morning.

This is no different that if my call is ignored, in the money and exercised. I now own the shares and have a different risk that when I started. Bad news over the weekend could wipe out the gain I had. The is the risk of partying at 4 PM on option expiration Fridays. The party starts when your last position is closed.