question on Put Options
I'm new to Options and puts in general.  My question is this:  if I buy say 10 contracts of SPY for Jan 10 90 (100) do I need to own any of the actual SPY stock when I go to
exercise that option on or before the expiration date?

Or do I just exercise the Put Option without ever owning any of the stock and just take the profits based on the price
difference between now and January 2010?



Hello Brian,

This is a good question.

1) You do NOT have to own any shares of SPY.

2) IF you do exercise the options, you would then be short 1,000 shares.  If you do not want to be short, or if you are not allowed to carry short stock, then don't exercise.

3) I don't like to use the word 'never' when discussing options, but here is my rule:  NEVER EXERCISE AN OPTION.  Just sell it and take your profit  (or loss).

There are a couple of situations in which exercising makes sense, but as a put rookie, let's ignore those for now.  You may trade your whole life and never exercise an option.  That's a good thing.

When you no longer want to own an option, just sell it.

4) To 'exercise and 'just take the price difference' you must be using European style options.  Those are available for the broad based indexes, such as SPX, RUT, NDX (NOTE: not OEX).  SPY options are American style and you cannot exercise for that 'price difference.'

Here are two posts about the difference between American and European style options:

Mark D. Wolfinger

The Rookie's Guide to Options:The Beginner's Handbook of Trading Equity Options