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I think about making my first options trade and after studying a bit, I couldn't find answers to some of my questions. So here I am.

What I want to do is buy a PUT option on a stock that I speculate it's price will drop by e.g. 75% within the next 18 months. In that case, the absolute worse scenario is that I'll lose my premium, which is fine.

Now, assume that the underlying stock value decreases by 25% in the next say, 4 months - and that my option's price increases, since now there is a bigger probability for the stock to fail. If I decide to close my position at this point and pocket any profit made, do I need to write the option to someone else? How is it technically done and what are my obligations at this point? From what I understand, if you buy a PUT option but you cannot afford the underlying stock, then essentially you have to wait for the price to go below the strike price, otherwise, if you wanna sell, you're essentially writing a naked option. Is my previous assumption correct, or the only thing I have to do is to give a sell-to-close order and I'm out of that trade?

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the only thing I have to do is to give a sell-to-close order and I'm out of that trade?

Correct. You put in a sell order and it closes your position. The clearing house takes care of all of the mechanisms of someone else "taking over" the option contract.

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Now, assume that the underlying stock value decreases by 25% in the next say, 4 months - and that my option's price increases, since now there is a bigger probability for the stock to fail. If I decide to close my position at this point and pocket any profit made, do I need to write the option to someone else?

You bought to open (BTO) the option, now you sell-to-close (STC) it.

How is it technically done and what are my obligations at this point?

You interface with your broker when buying and selling the option. If an option is exercised/assigned, the OCC (Option Clearing Corp) also gets involved. All of the mechanics of this is seamless and is handled by them.

From what I understand, if you buy a PUT option but you cannot afford the underlying stock, then essentially you have to wait for the price to go below the strike price, otherwise, if you want to sell, you're essentially writing a naked option.

If the underlying drops soon, your put can become profitable before the stock reaches the strike price. There is no involvement with 'writing a naked option' here.

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  • The original poster should consider getting a better understanding of options, based on incorrect usage of terms 'write', 'naked option' and 'premium'. However, if OP keeps it simple and follow this advice to "sell to close" then it should be OK. Jul 17 at 4:28

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