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I'm a little confused on how options trading works, namely what you are selling when you sell an option.

Let's say you buy a put option for 100 shares at a strike price of $100 for a company XYZ that has a stock price of $100. If you believe the price will go up to $120 and sell the option for a premium of $50, are you then responsible if the person to whom you sold the option exercises it? Or is the option writer the one who has to buy the 100 shares from the person you sold the option to at the strike price of $100?

Any help is appreciated

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  • Try to think of an "option" as just a "thing". A "car" is a thing. A "house" is a thing. An "option" is just a "thing" you buy and sell. Generally the shares are not involved at all. Just buy and sell the "things", the "options".
    – Fattie
    Jun 15 at 11:31
  • shares are also just things. the options derive from the shares, making them a thing dependent on another thing. and the shares become pretty involved when the options expire ITM, which happens like 30% of the time. Jun 16 at 3:38
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Let's say you buy a put option for 100 shares at a strike price of $100 for a company XYZ that has a stock price of $100.

So now you have an option.

If you believe the price will go up to $120 and sell the option for a premium of $50, are you then responsible if the person to whom you sold the option executes it?

No. You just sold the option you bought. You delivered the option to the buyer, so you have no further obligation to them.

Or is the option writer the one who has to buy the 100 shares from the person you sold the option to at their original price of $100?

That's what the option writer agreed to do when they wrote the option. Whoever holds the option can exercise the option and force the writer to honor their obligation.

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Let's say you buy a put option for 100 shares at a strike price of $100 for a company XYZ that has a stock price of $100. If you believe the price will go up to $120 and sell the option for a premium of $50, are you then responsible if the person to whom you sold the option executes it?

A couple of things. (not to be mean)

  1. the word you should probably use for this is "exercise", not execute
  2. it's important to be able to distinguish between STO and STC. At one point I didn't understand this, and was confused like you are. I lost $1k-$2k because of it. It would've been easily avoidable if I understood how closing an option contract works. In this case, as soon as you STC, you've officially separated yourself from any liability or responsibility related to the contract.
  3. when you bought the contract (BTO), your position was +1. as soon as you sold the contract (STC), that action was equivalent to -1, and your effective position went back down to 0, meaning 0 holdings and 0 responsibility starting at that point.

Or is the option writer the one who has to buy the 100 shares from the person you sold the option to at their original price of $100?

  1. this is closer to the truth. however...

  2. a little bit pedantic, but when you opened a position, you didn't hold a contract with any one specific individual. (though generally speaking when you buy a contract to get to +1, someone else was simultaneously selling a contract for a -1 position. there has to be a net balance in contract positions.) when a contract is exercised or expires ITM, the OCC assigns random market participants who have a -1 position in the same option series (same underlying ticker, strike price K, and expiration date T, etc) the responsibility to buy the shares pursuant to the contract and its stipulations therein.

    • a. in the event of ITM expiration, almost every seller with -1 or less in that option series will be assigned the maximum number of shares to purchase to the full extent. -10? that means they'll need to buy 1000 shares. their brokerage will handle the transactions normally on his/her behalf. the shares will come from random participants who were +1 or greater. they need not be the identical person who BTO when the option seller STO.
    • b. in the event of early exercise, only a small minority of contract sellers will be assigned based on how many contracts are involved. it is random. however, the practice is rare. I've been assigned early once (but it was on a cc instead of a put). I think they thought that they'd get the dividend, but it was already ex-dividend.

Hope this answers all your questions. Let me know if there's anything else that's nebulous.

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There are two scenarios, quite different, for selling a put option:

  • Sell to close - you previously purchased a put option, now you are selling it to close your position. A closed position has no further obligations.
  • Sell to open - you sell a put option and have an open obligation to buy shares

https://www.investopedia.com/ask/answers/sell-open-buy-close-buy-open-sell-close-mean/

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You can open an option position in two ways:

  • Buy to Open (BTO) means that you are buying an option as a new position

  • Sell To Open (STO) means that you are selling an option as a new position

If you Buy to Open a position, you exit it by selling to close. BTO + STC = no position

If you Sell to Open a position, you exit it by buying to close. STO + BTC = no position

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