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"Do I Have To Buy Stocks To Buy Put Options?"

Question By Jay

"Do I Have To Buy Stocks To Buy Put Options?"

Okay, say I want to use a put option on company XYZ whose current stock price is $12.00. The strike price I put is $11.00. Do I need to actually buy the 100 stocks in order to place the put option?

Asked on 24 Nov 2012

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Answered by Mr. OppiE

Hi Jay,

This is a very common question I get from options trading beginners. Such questions arise mainly due to the poor understanding of the mechanics of options as a financial instrument which is common amongst amateur traders without academic financial background (which is what is here to help in).

The short answer is, No, you don't have to buy stocks in order to buy or short put options at any strike prices.

Put options give you the RIGHT but not the OBLIGATION to sell the underlying stock at the strike price. When you buy a put option, you are buying the right to sell the stocks. That right isn't triggered until the option is exercised no matter if those put options are out of the money or in the money at the point of purchase. Until that happens, that put option is just a piece of paper (in fact, you don't even get to physically see that piece of paper) with no impact on the stock market at all. Hence, you don't have to own any long or short position in the stocks itself in order to trade options at this point.

Even if your put options are exercised (or assigned) without any positions in the underlying stock, you automatically end up with a short stock position which is shorted at the strike price of the put options. So, again, you are not obligated to have any positions in the underlying stock.

In order to buy put options without any positions in the underlying stock, simply use the Buy To Open order in your trading form will do.

In conclusion, you don't need a position in the underlying stock, whether long or short, in order to buy (or short) put options (or call options for that matter) at any strike prices (out of the money or in the money).

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