0.,ter 15: Put Option Basics 251 
ly sell stock in the open market to offset the purchase that he is forced to make via 
the put assignment. Finally, he may decide to retain the stock that is delivered to him; 
he merely keeps the stock in his portfolio. He would, of course, have to pay for ( or 
margin) the stock if he decides to keep it. 
The mechanics as to how the put holder wants to deliver the stock and how the 
put writer wants to receive the stock are relatively simple. Each one merely notifies 
his brokerage firm of the way in which he wants to operate and, provided that he can 
meet the margin requirements, the exercise or assignment will be made in the 
desired manner. 
ANTICIPATING ASSIGNMENT 
The writer of a put option can anticipate assignment in the same way that the writer 
of a call can. When the time value premium of an in-the-money put option disappears, 
there is a risk of assignment, regardless of the time remaining until expiration. In 
Chapter 1, a form of arbitrage was described in which market-makers or firm traders, 
who pay little or no commissions, can take advantage of an in-the-money call selling 
at a discount to parity. Similarly, there is a method for these traders to take advantage 
of an in-the-money put selling at a discount to parity. 
Example: XYZ is at 40 and an XYZ July 50 put is selling for 9¾ a ¼ discount from 
parity. That is, the option is selling for ¼ point below its intrinsic value. The arbi­
trageur could take advantage of this situation through the following actions: 
1. Buy the July put at 9¾. 
2. Buy XYZ common stock at 40. 
3. Exercise the put to sell XYZ at 50. 
The arbitrageur makes 10 points on the stock portion of the transaction, buying the 
common at 40 and selling it at 50 via exercise of his put. He paid 9¾ for the put 
option and he loses this entire amount upon exercise. However, his overall profit is 
thus ¼ point, the amount of the original discount from parity. Since his commission 
costs are minimal, he can actually make a net profit on this transaction. 
As was the case with deeply in-the-money calls, this type of arbitrage with 
deeply in-the-money puts provides a secondary market that might not otherwise 
exist. It allows the public holder of an in-the-money put to sell his option at a price 
near its intrinsic value. Without these arbitrageurs, there might not be a reasonable 
secondary market in which public put holders could liquidate.