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I would like to sell 5 contracts (Sell to Open - Cash reserved PUT) for stock C3AI with expiration of Jan 23 for a strike price of 60 (Stock trading at $69 at this moment). That gives me $9800 premium. What happens when the stock reaches $60 next month?

  1. Will I get assigned 500 shares as soon as it reaches $60 and I keep the premium?
  2. Because the buyer has an opportunity to wait till Jan 23, will my investment be stuck until Jan 23 even if the stock reaches $60 way before expiration date?

I am okay with the shares being assigned, but would not like to lose the $9800 premium.

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Will I get assigned 500 shares as soon as it reaches $60 and I keep the premium?

Most likely not. What's more likely is that if the buyer wants to close their position they'll sell the option. It's usually more profitable to sell to close a position than to exercise early. But it is possible.

Because the buyer has an opportunity to wait till Jan 23, will my investment be stuck until Jan 23 even if the stock reaches $60 way before expiration date?

No - you're not stuck. You can always "buy to close" your position. Your closing order will reduce the $9,800 "profit" you received in premium, however. If you buy the option back for more than you received for it, obviously you'll have a loss overall.

I am okay with the shares being assigned, but would not like to lose the $9800 premium.

You're not going to lose the premium. The premium is yours to keep regardless of whether the option is exercised or not. If you buy to close as discussed above, though, your net profit will be reduced by how much you bought the option for.

At expiry, however, (or if the option is exercised early) you might end up with a loss since you will have to buy the underlying stock at $60 and can only sell it for market price. The maximum loss is the strike price of the option (since you could be forced to buy a worthless stock at the strike price), but practically you can manage how much you lose.

If you want to limit your loss to less than the maximum, you can enter a limit buy order to "buy back" and close your option position for whatever you want to limit your loss to.

The main point (from a PnL standpoint) when selling cash-secured puts is that your gain is capped by what you receive upfront in premium. That only happens if your option expires out-of-the money. If your option is in-the-money, then your gain will be reduced by how much in-the-money the option is.

If you want to play around as a learning experience, that's fine, but be sure you have the proper measures in place (e.g. limit buy orders) to limit any loss to only what you can afford to lose.

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    "If you want to play around as a learning experience, that's fine." - I guess. But Ihope OP continues to ask questions before entering into any trades. Glad he's asking this before, and not after the fact.
    – JTP - Apologise to Monica ♦
    Apr 22, 2021 at 16:34
  • @JTP-ApologisetoMonica Fair point - My thought was if they have a large nest egg and can afford to lose $1k without changing their life, then losing 10% on a $10k trade might be a valuable lesson. If losing all $9600 or more would be a significant loss, then they should stay away from options (at least of that size).
    – D Stanley
    Apr 22, 2021 at 17:11
  • It's a good answer other than the part about unlimited/infinite loss. That's for naked calls. For a naked put, the maximum loss is the strike price less the premium paid. –
    – Bob Baerker
    Apr 22, 2021 at 18:00
  • 1
    @BobBaerker Good catch - thanks, Bob.
    – D Stanley
    Apr 22, 2021 at 18:12
  • 1
    Just my two cents but despite the lower premium, verticals are a better way to go. Built in risk protection. 2023 leaves a lot of time for IT to hit the fan.
    – Bob Baerker
    Apr 22, 2021 at 18:19
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An option's price is primarily dependent on share price, time decay and the implied volatility. It's a bit complex.

What happens when the stock reaches $60 next month?

If implied volatility remains the same then one month from now you will have a loss on your position (the price of the put will be higher).

Will I get assigned 500 shares as soon as it reaches $60 and I keep the premium?

As long as the put has time premium remaining, you are highly unlikely to be assigned early. If the time premium is very low and there's a pending dividend, sometimes early assignment occurs. That's not going to happen any time soon.

Because the buyer has an opportunity to wait till Jan 23, will my investment be stuck until Jan 23 even if the stock reaches $60 way before expiration date?

You will likely be stuck until then. However, if your stock drops well below $60 and it's not far until expiration, early assignment is much more likely.

I am okay with the shares being assigned, but would not like to lose the $9800 premium.

On an expiration basis, you would not lose all of the $9,800 premium unless the stock dropped below $40.40

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