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Strategies & Market Trends : Option Spreads, Credit my Debit
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To: NateC who wrote (527)2/14/1999 1:44:00 PM
From: dealmakr   Read Replies (2) of 2317
 
Nate,

If you short a stock @ 100 and write puts on that stock at a strike price of 90 a couple of things can happen.

Stock shorted at expiration is still 100, Puts expire and premium is kept.

Stock shorted at expiration is at 95, Short position is in the money by 5 points and the puts expire and premium is kept.

Stock shorted at expiration is at 89 per your example. Puts are exercised against you and you have to buy the stock at 90. This buyin will in effect cover your short position as a sell and a buy = neutral. The profit potential is 10 points on your shorted stock and possibly any leftover premium if any from your put writing. This is actually a common strategy for shorts and not rare at all. It is also dangerous if your short position runs against you and the only benefit is the reduced premium for buying back your put position will offset some of the upward movement of your short position. You have to be comfortable with shorting and aware of the risks to use this option strategy IMHO.

Dave
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