Exercising OTM long puts to drive down stock price
Exercising OTM long puts to drive down stock price
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CactusCake · External communityPost link
External question — Personal Finance Stack Exchange
Author: CactusCake
Original post: https://money.stackexchange.com/questions/165607
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Thought experiment. Say I had 10,000 separate long put contracts (representing 1 million shares) on XYZ with a strike price of $100 and all with the same expiration date some ways in the future, maybe a couple of months. Just for completeness, we'll assume an average premium of $5. So to be profitable we want the price to drop to $95.
Now assume the price has been inching up, it's now $120. Exercising one of these $100 puts would mean taking a loss, so it's generally considered pointless. But can you force your broker to do it anyway? And if you did, what would actually happen? Would they offer the underlying shares at the strike price or at the current market price?
Assuming the shares are sold at market bid (or lower), this would take the highest bid off the order book. Now rinse and repeat with the next put option, same result. Ignoring the financial destruction going on in your own portfolio, it stands to reason that this would start driving the price down. Say you kept going and effectively caused a run where other investors are panicking and selling their positions. At some point, some of those other long puts are going to end up ITM.
To keep the question answerable, consider the inquiries in the second paragraph rhetorical. What I really want to know is:
Could this
overall
strategy play out as imagined?
Would any brokerage firm let you do it?
Does it violate any laws?
Disclaimer: I do not have the intention (or disposable income) to try this sort of thing, I am just curious if the big players ever can/do this sort of thing.
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0xFEE1DEAD · External communityPost link
External answer — Personal Finance Stack Exchange
Author: 0xFEE1DEAD
Original post: https://money.stackexchange.com/a/165610
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For you to be long, someone else would need to be short the puts.
When you exercise them, whoever is assigned will buy them at the strike price. The buyer can turn around and sell them at the current market price, for an instantaneous profit.
If you don’t have the shares, you’ll be left with a short, which you also need to close at the market price.
Unless the stock is illiquid or you corner the market, there isn’t going to be much of an impact other than your own losses.
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Bob Baerker · External communityPost link
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Author: Bob Baerker
Original post: https://money.stackexchange.com/a/165627
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You own $100 puts. Share price rises from $100 to $120.
I am short the puts. You exercise some of them, selling shares to me at $100 (a $20 loss). Happy me! The shares transfer and there's no effect on the market.
If you owned no shares, the broker(s) would borrow the shares from another account so that you could sell them to me. You end up short the shares. Again, no effect on the market.
Suppose I decide to sell the shares. Do you think that 100k or 200k shares is going to drive GOOG (trades 20M shares per day) down 25 points? (pretend that GOOG is $125).
If I was short the shares originally (a covered put), exercising your puts would result in the closure of my short equity position and the borrowed shares would be returned to the lender, assuming that I did not want to remain short the shares. Again, no effect on the market.
There are other permutations but the end result is pretty much a nothing burger.
The problem with all of this is that you started with a false premise (exercising long puts for a $20 loss is sane) and then built a thesis upon it, ultimately reaching an errant conclusion.
The short version? You're going to take a $20 loss on some exercised puts in order to get back to less than breakeven on your puts that were once worth $5 (they'll be worth less at a later date, assuming that implied volatility has not increased significantly). Your short shares will breakeven at $100. This is an exercise in futility.
I don't know about other brokers but my broker does not allow out-of-the money puts to be exercised.
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Quoted from Forex.com.bd-Editorial External answer — Personal Finance Stack Exchange Author: Bob Baerker Source score (net votes, not local likes): 3 Original post: https://money.stackexchange.com/a/165627 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. You own $100 puts. Share price rises from $100 to $120. I am short the puts. You exercise some of them, selling shares to me at $100 (a $20 loss). Happy me! The shares transfer and there's no effect on the market. If you owned no shares, the broker(s) would borrow the shares from another account so that you could sell them to me. You end up short the shares. Again, no effect on the market. Suppose I decide to sell the shares. Do you think that 100k or 200k shares is going to drive GOOG (trades 20M shares per day) down 25 points? (pretend that GOOG is $125). If I was short the shares originally (a covered put), exercising your puts would result in the closure of my short equity position and the borrowed shares would be returned to the lender, assuming that I did not want to remain short the shares. Again, no effect on the market. There are other permutations but the end result is pretty much a nothing burger. The problem with all of this is that you started with a false premise (exercising long puts for a $20 loss is sane) and then built a thesis upon it, ultimately reaching an errant conclusion. The short version? You're going to take a $20 loss on some exercised puts in order to get back to less than breakeven on your puts that were once worth $5 (they'll be worth less at a later date, assuming that implied volatility has not increased significantly). Your short shares will breakeven at $100. This is an exercise in futility. I don't know about other brokers but my broker does not allow out-of-the money puts to be exercised.
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