>>>I can still do that if no shares available, correct?<<<
If you own a put, you can exercise. Period. The exchanges will stand behind the product - as they must if they expect to have an attractive market place, from which they can make a profit. (See the New York Stock Exchange going public.) The NYMEX will make good on any futures contracts, and flay anyone who defaults.
You may or may not get your short shares. That is a very interesting subtlety which I regret I cannot answer. I have sold calls and been assigned. If there are no shares available to short, my brokerage (Schwab) will "buy me out" within 14 trading hours - i.e. Tuesday noon following expiry.
Effectively and as far as you are concerned, whether you get a real short or a naked short as a consequence really doesn't matter. You are in your position and any movement from there is at your risk. If you have long shares in your account when you exercise, you will simply close your position - often by creating a box which will/can then be leveled - at no additional trading commission. If you are "naked short" you can buy to close. The commission structure results in the same trading costs regardless of path. If you wanted to remain short you would not have exercised.
As far as the process of assignment goes, you can be sure that there are hard and fast exchange rules. I would be very surprised if your brokerage didn't look internally first, I would suppose in its own account for shares to loan, then in client's accounts which had done "sell writes" and then in accounts with naked short puts. Very coincidentally, I had a BZH "sell-write" exercised against me on Tuesday. Basically I lost my short shares against the exercise. If I were naked, then I would have had to buy to close.
At the end of the day I would suppose that exchange rules would require that it be done within the brokerage which allowed the client to go long the put with the subsequent client exercise. It is just some much less hassle and can always be handled internally: 1)if the brokerage has the shares to lend - it does, 2) if a client is short the shares, he looses them - by the rules of the game shorts can always be "called away," 3) a client with naked puts can always buy in the market to close his naked short as a result of being exercised. I think that your broker would look outside for shares to borrow with whatever other brokerages with which it had a relationship, if a naked put were assigned internally. Absent that, it would force you to buy to cover. |
