jwblue wrote:Lets say I buy a put option to sell 100 shares for $170 each.
The stock goes down to $50.
What if I want to exercise the put option and the person does not have the funds to buy the shares from me for $170 x 100?
Is he forced to buy regardless if he has the funds?
Am I SOL or does the brokerage of the put seller eat that loss?
The exchange monitors his loss on the position each day. If he exceeds his margin, his margin is called, and his position closed out. That's how they control counterparty risk. Over The Counter options (OTC) you have no such protection (you write what you want into the contract).
Can I buy a put option without owning the stock?
Say I buy a put option for $170. If the stock goes down to $50.00. I buy the stock for $50.00, then exercise the put option.
No you just exercise the put option. You receive the stock in return for the $50. Buying it would reverse your position. If your Strike was $170, the underlying drops to $50, and your option premium was $10, then you'd make $170-50 - 10 = $110. You've also lost the interest on the $10 since you bought.
Is my loss limited to the cost of the put option? It seems a great way to short a stock.
You would make a profit on the difference between the Strike Price and the price at exercise less the Option Premium (what you pay for the option contract to the writer/ seller).
What if I do not own the stock and the stock goes down to 0 overnight? Can I still exercise the put and make the profit?
Yes. An American Option allows exercise at any time up to expiry. A European Option allows exercise only at expiry. (from memory, an Asian Option is a combo of the two).
Don't think that traded options are an inefficient market. They are highly efficient although transactions charges are large.
Also, US tax law, I think you'd pay ST capital gains tax? In Canadian tax law, if the government decided you were an options professional, you'd pay income tax.