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If I buy a PUT without owning any shares in the underlying stock, what happens if it expires in-the-money? The seller will be required to buy the shares, but whose shares?

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If an option is one cent or more ITM at expiration, the OCC will automatically exercise it whether long or short. This is called Exercise by Exception. For equity options, you'll end up with a position in the underlying (long ro short). If you are long the option, you can designate to your broker that your options not be exercised at expiration. This would make sense if ITM by pennies and your commission to close exceeds the premium available.

In your situation, your long put would be exercised. The shares would be borrowed on your behalf by your broker, the proceeds for the sale of the shares would be credited to your account, and you'd end up with a short position in the stock. There might be complications if the shares were not available to borrow but let's keep it simple for now.

  • Being short shares could trigger a margin call. I knew short options could cause this, but I didn't realize long options could too. – alekop Jul 19 '18 at 3:39
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You bought the put. You are required to buy the shares if you hold it until expiration. Your position at expiration becomes a short. This would only happen if the shares close below the strike price, so you are also given enough money to buy the shares and have money, your profit, left over.

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    That's not a clear or necessarily correct explanation. The exercise of the long put becomes a short position in the stock with the proceeds from the sale credited to the account. In order for it to be a profit, the gain from the stock trade (when closed) must exceed the cost of the put. If good news hits during the after market, share price could zoom and the entire position could turn into a huge loss (think Netflix in reverse, down 46 points in the after market yesterday). – Bob Baerker Jul 17 '18 at 21:06
  • @BobBaerker Assuming you have a margin account, your broker lends you 100 shares of NFLX at the closing bell, the put is exercised at the strike price of $400 let's say, so you get $40,000. On Monday, NFLX opens at $450, but you're short 100 shares and you hasten to cover at a $5000 loss? I thought longing options had a LIMITED downside. BUMP – ToniAz Jul 18 '18 at 1:04
  • Bob is right. Once the option expires, if you are not completely out of the stock, you have risk. I buy a call, for pennies, the stock explodes, and Saturday of expiration I have 1000 shares of a stock and say, a current gain of $5000. But it opens down $15 on Monday and I have a $10,000 loss. For options that cost $100. – JoeTaxpayer Jul 18 '18 at 1:24
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    @ToniAz - Yep, long options have limited risk but if they get assigned/exercised into a stock position then Sayonara limited risk. IOW, if you end up long shares due to assignment then you have downside risk and if you end up short shares then you have upside risk. Pray for a no news weekend :->) – Bob Baerker Jul 18 '18 at 2:46

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