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I'm intstd in selling short as there's a stock I think will drop, but i've never done it and am filled with trepidation. I head to options on my trading site and off the bat seem to have five...options...namely buy/sell to open/close and 'exercise'. I think I want to "buy to open" puts which iiuc are options to sell. If I take e.g. the $14 strike I'll pay $2.45 for the right to sell at $14, until April 14th. And I can then 'sell to close' (which I suppose means, sell the option) or 'exercise' (which means sell the stock at $14) any time till the 14th. If I 'exercise' I'll need to have bought the stock beforehand. Do I have all this right?

transaction page at tda

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You're close but your explanation needs some fine tuning.

Creating a new option position means to 'open'. It can be 'buy to open' (going long the option) or sell to open' (going short the option).

If you buy the Apr 14 $14 put, you have the right to sell the stock anytime between now and expiration for $14 (exercise). You do not have to own the stock to do so, in which case you would end up with a short position in the stock as long as it was borrowable at the time of exercise.

You could also close the long put position by 'selling to close'.

A word of caution: The last few weeks before an option's expiration is a period of increasingly rapid theta decay. That means that unless your stock drops, much or even all of the option's time premium is going to be lost by 4/14 which is only 4 days away (the market is closed on Friday for the holiday). You really need to be right about this or it's a loser in no time at all.

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  • great this helps a lot - so the stock not being borrowable at time of exercise is (i suppose) the dreaded 'short squeeze' , which i would avoid by having bought the stock already? Apr 11 at 10:25
  • ... which undercuts the point of the trade namely to buy at the (expected) lower future price but sell according to current prices Apr 11 at 10:31
  • While it's possible that this may occur during a short squeeze, it does not mean that a short squeeze is occurring. If a stock isn't borrowable, it means that there are no willing lenders of the stock available to provide the short seller with shares to sell. Apr 11 at 12:09
  • If you want to exit your long put, you can (1) Sell it, (2) Exercise to close an existing position in the underlying, (3) Buy 100 shares and exercise the put, (4) Exercise and go short the underlying. Only the last choice has the limitation of shares being borrowable. Apr 11 at 12:09

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