Deciding on a Stock

The risk that exists when a put option contract is sold is that the stock is able to considerably go down a great amount to which you will then be obligated to purchase it. In reality this is the same situation for anybody who bought XYZ straight up in their brokerage account previous to an imaginary unpleasant incident occurring. All of the people that purchased one hundred shares of XYZ for 22.63 per share on the exact day in which you sold your put option, has paid $2,263 straight up and will now be facing a $21.63 per share loss. Obviously the situation we have just described is quite extreme and not very likely to occur, however the idea here was to simply demonstrate the risk that is involved in naked put selling. Keep in mind that you will only be taking on a risk until a specific date, and after that date, if you do not need to purchase the stock, the option will expire and this will no longer be an obligation. Remember that the decision of this stock needs to be one that you really want and that you feel good about purchasing it at a lower price than it was trading at and that a person was disposed to pay an up front amount to wait and observe what would occur when expiration came along. Therefore, from what you can see it was a very good opportunity to purchase a good stock and on top of it, get paid to do so.

How are shares obtained?
If for instance our imaginary XYZ stock closes under the strike price expiration, what occurs then? We will imagine that XYZ closes at $19.80 on the expiration date. In this case the buyer would carry out his side of the contract and will get assigned to one hundred shares of XYZ stock for $20 for every share. These are terms that talk about the process that the buyer of an option carries out the part of the deal and you are then obligated to buy one hundred share of XYZ. The one hundred shares would be seen in the brokerage account and you should have a good amount of cash to cover the costs of the shares that you were assigned. What is taking place is that you are actually only paying $1,950 for the one hundred shares, given that you obtained $50 straight up at the start of the transaction of the option. The real costs basis is indeed $19.50 for every share. This how it is done. This is how you can purchase one hundred shares of XYZ to under where it was trading the very day you soil the put option, and an individual provided you with $50 for every option contract for your work.