"Is Writing Put Options Speculating or Hedging?"
"When I write (Sell To Open) put options, am I considered to be speculating or hedging?"
- Asked By Mary on 14 Oct 2010
Answered by Mr. OppiE
Yes, sell to close is different from writing
When you write an option, which is essentially to short an option by creating a new options
contract and selling it to another investor through an exchange, you would have to use the
SELL TO OPEN
order as your opening order. A Sell To Open
order is used to open a position by selling, which translates to writing an option. In this case, your position would be open for assignment anytime
it is in the money
However, When you bought
those put options
that you own right now, you used the
BUY TO OPEN
order, right? When you use a Buy To Open order, you are opening a position by
buying an existing put option from the exchange, which means that you are not liable for assignment at all. In fact, you have the right to
exercise the option if you want to as you are the holder of the put option, not the writer. In this case, when you close your put options position
using the SELL TO CLOSE
order, you are closing the position by selling the put options that you own back to the exchange and you will not be liable
for assignment at all.
unless you are a writer of an option, you will not be subjected to assignment and to be a writer of
an option, you would have to open a short position using the SELL TO OPEN order. In your case, feel free to sell your put options using the
SELL TO CLOSE order as you will not be assigned and you would have simply realized whatever profit or loss that the position has incurred so far.