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