Let's say I bought a put from an option writer. I don't really want to put the stock, I was just betting that the stock would fall. So I want to sell the option (for a profit) back before expiration. Now the option writer doesn't care to bet whether the stock will go up or down, so when he writes the put, he shorts the stock so that he can stay hedged. And when I sell the put back, he closes his short, and thus buys the stock. So, when I sell the put, the option writer buys the stock.
Now, suppose I actually plan to deliver the stock, and I don't close the put out, but rather exercise it. Nothing happens in that case because when the option writer recieves the stock, it closes the short too with no buying or selling of the stock.
A third transaction is that I write a put. This is the reverse transaction, so the effect is opposite. Unfortunately it isn't possible when looking at the open interest to tell how many positions are hedged, and on which side. My assumption is that most of the puts are held by speculators, and most are written by professionals who are hedged, but you can never be sure that this is the case.
Hope this doesn't confuse you more,
Carl |
