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If I sell a put option and buy it later back, what does that mean for the buyer? Can he now sell the shares to my seller?

I don't quite get this relationship.

Also, what if I have a very deep ITM put option as a buyer, but I cannot sell it, because it is not liquid at this price?

Am I then forced to excercise it, to get the profit?

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You don't necessarily buy back the put option from the original buyer - it is most likely a different seller that is opening a new position or closing an existing one. The exchange/clearing house will connect the original buyer with the new seller. Nothing practical changes from the original buyer's perspective.

Also, what if I have a very deep ITM put option as a buyer, but I cannot sell it, because it is not liquid at this price? Am I then forced to exercise it, to get the profit?

You could probably at worst sell it for slightly less than intrinsic value. Someone (possibly a market maker) would be willing to capture the arbitrage profit.

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  • Great, thx! The part with the clearing house was the missing part on my side.
    – Juergen
    Commented Apr 8, 2021 at 16:20
  • Need to keep clearly in mind the difference between buying/selling an instrument (such as a put) and exercising it. Whoever owns it, whenever he owns it, may exercise it. Once exercised, the instrument ceases to exist.
    – Orange Coast- reinstate Monica
    Commented Apr 8, 2021 at 18:21
  • @OrangeCoast-reinstateMonica Only American-style options can be exercised at any time. European options (which index options are) can only be exercised at expiry.
    – D Stanley
    Commented Apr 8, 2021 at 18:50
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If I sell a put option and buy it later back, what does that mean for the buyer? Can he now sell the shares to my seller?

You are buying to close your short put. If your counter party is selling to close then the contract ceases to exist. If your counter party is selling to open then the contract just changes hands (he replaces you on the short side).

Also, what if I have a very deep ITM put option as a buyer, but I cannot sell it, because it is not liquid at this price?

You can always sell the deep ITM put because the market maker must provide a quote. However, his bid may be less than the intrinsic value of your put (a haircut).

You could try for some price improvement with your STC order but there is no incentive for the market maker or anyone else to give you the full intrinsic value. While waiting for a better fill, the price of the underlying could change and you could give back some of your intrinsic value.

To avoid this haircut, if you have the cash or appropriate margin, you could perform the same Discount Arbitrage that a market maker would do if you sold your put to him at a discount (buy stock, exercise put). Buy the stock first to avoid directional leg out risk.

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