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Sometimes when I want to short a stock, my broker says that no shares are available for borrowing.

In this situation, can I buy a put and exercise it immediately and end up with a short position? in this case, who is the person lending me the shares to sell? My broker? It is certainly not the PUT seller.

  • You could probably find the answer in your broker's term in conditions, but one option is that they buy the shares on your behalf with a market order. – Pieter Naaijkens Nov 2 '14 at 17:29
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You can buy a put and exercise it. The ideal option in this case will have little time premium left and very near the money.

Who lent you the shares? The person that sold you the option! In reality, when you exercise, assignment can be random, but everything is [supposedly] accounted for as the option seller had to put up margin collateral to sell the option.

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    This makes no sense. The seller of the put has agreed to buy the shares if assigned. Shorting shares involves 3 people: lender, borrower (who shorts) and buyer. You only have 2 parts of the equation (shorter and buyer with no lender). The option seller's collateral has nothing to do with the shorter. – Bob Baerker Dec 12 '19 at 19:07
  • @BobBaerker can you or can you not amass a short position by exercising a long put option? you seem to be debating the explanation and not the accuracy of whether it solves what OP is trying to do. at least acknowledge if the conclusion is accurate while breaking down the nuance – CQM Dec 14 '19 at 6:59
  • Explain to all of us how if shares are not borrowable then you can exercise your long put and sell shares that you don't own to the assigned writer of the option. Explain how the writer of the put "lent you the shares" because he "sold you the option!' when in fact, he's buying the shares from you which you can't deliver to him. Explain how the broker settles this trade and delivers these non existent shares to the buyer (the person whose short put was assigned). Inquiring minds would like to know. – Bob Baerker Dec 14 '19 at 16:00
  • @BobBaerker shares not being borrowable by new people means that it costs higher interest for the shares that actually have been borrowed. this is reflected in the put call parity price. The options market functions the same as it always does with the puts having a higher price and reflects the risk of whoever has to actually deal with delivery and holding the short position. Feel free to add your own answer if you care about the mechanics that have nothing to do with the trader's experience. – CQM Dec 15 '19 at 11:12
  • Explaining why increased borrow costs affect option prices has nothing to do with this and is just dodging the OP's question as well as my comments about your nonsensical answer. How can a stock position come to exist after long put exercise without borrowable shares available? The assigned put seller buys the shares. Where does the broker find such shares so that he can deliver them to him on T+2 settlement date? The owner of the put doesn't own them. The broker can't fabricate new shares out of thin air. Figure that out and you'll understand what's wrong with your answer. – Bob Baerker Dec 17 '19 at 1:04
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When you hold shares short, your broker can "call" the loan at any time and make you purchase shares in the open market to cover the short. What would probably happen in this case if you exercise the put is that you would become short the shares and if the shares were too hard to borrow, the broker would buy the shares on your account to cover the short. That is just a guess on my part, and it's also possible that if the shares were hard to acquire, but not impossible, the broker might allow you to remain short. It would be worth a try if you did not have much premium in the option.

I have used that strategy before, not because the shares were hard to borrow, but because the broker policy prohibited shorting stocks with a share price under a dollar. For one stock that was under a dollar, I purchased near-term, in-the-money puts, then exercised them. That meant that I was now short the shares. The broker allowed me to remain short for the shares. Of course this is the type of thing that might vary from broker to broker.

  • Yes, if a put is exercised, resulting in short shares and the shares are not borrowable, the broker will immediately buy shares to cover the short stock position because he will not be able to settle the trade with share delivery. Some brokers will not allow exercise of the long put in such circumstances. – Bob Baerker Dec 12 '19 at 19:12
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You are the one lending yourself the shares to sell;you purchase the stock at market price and sell at the strike price of the option to the put seller when you exercise the option.

  • So you are suggesting that I cannot exercise the put unless I own the underlying ? – Victor123 Nov 3 '14 at 3:07
  • Yes, let's say the trade went your way, and the price drops to below your strike price. You can either a)sell the option for higher premium or b)exercise with the underlying being assigned in which case you buy at the market price and sell it at the higher strike price to the put seller which nets you the difference. – Akrasia Lee Nov 3 '14 at 6:10
  • @Victor123 When you exercise it you will find that you have a 100 share short position. I think you should be able to exercise it as long as your account has enough margin to be 100 shares short of the stock. Or whatever the lot size is – von Mises Nov 20 '14 at 2:46
  • This answer is correct as an answer for to how to close a profitable long put position. You can a) Sell the put to close or b) Buy shares and exercise the put to close the newly acquired stock position, booking the difference. However, it has nothing to do with the OP's question of turning a long put into a short stock position when shares are hard to borrow. – Bob Baerker Dec 12 '19 at 19:18

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