250 Part Ill: Put Option Strategies 
Example: XYZ is selling for $25 per share and will pay $1 in dividends over the next 
6 months. Then a 6-month put option with strike 25 should automatically be worth 
at least $1, regardless of any other factor concerning the underlying stock. During the 
next 6 months, the stock will be reduced in price by the amount of its dividends- $1 
- and if everything else remained the same, the stock would then be at 24. With the 
stock at 24, the put would be 1 point in-the-money and would thus be worth at least 
its intrinsic value of 1 point. Thus, in advance, this large dividend payout of the 
underlying stock will help to increase the price of the put options on this stock. 
On the day before a stock goes ex-dividend, the time value premium of an in­
the-money put should be at least as large as the impending cash dividend payment. 
That is, if XYZ is 40 and is about to pay a $.50 dividend, an XYZ January 50 put should 
sell for at least l 0½. This is true because the stock will be reduced in price by the 
amount of its dividend on the day of the ex-dividend. 
EXERCISE AND ASSIGNMENT 
When the holder of a put option exercises his option, he sells stock at the striking 
price. He may exercise this right at any time during the life of the put option. When 
this happens, the writer of a put option with the same terms is assigned an obligation 
to buy stock at the striking price. It is important to notice the difference between 
puts and calls in this case. The call holder exercises to buy stock and the call writer is 
obligated to sell stock. The reverse is true for the put holder and writer. 
The methods of assignment via the OCC and the brokerage firm are the same 
for puts and calls; any fair method of random or first-in/first-out assignment is 
allowed. Stock commissions are charged on both the purchase and sale of the stock 
via the assignment and exercise. 
When the holder of a put option exercises his right to sell stock, he may be sell­
ing stock that he currently holds in his portfolio. Second, he may simultaneously go 
into the open market and buy stock for sale via the put exercise. Finally, he may want 
to sell the stock in his short stock account; that is, he may short the underlying stock 
by exercising his put option. He would have to be able to borrow stock and supply 
the margin collateral for a short sale of stock if he chose this third course of action. 
The writer of the put option also has several choices in how he wants to handle 
the stock purchase that he is required to make. The put writer who is assigned must 
receive stock. (The call writer who is assigned delivers stock.) The put writer may cur­
rently be short the underlying stock, in which case he will merely use the receipt of 
stock from the assignment to cover his short sale. He may also decide to immediate-