What will happen when option premium rise very high for shorting put?

External question — Personal Finance Stack Exchange Author: showkey Original post: https://money.stackexchange.com/questions/163003 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Suppose the commission is zero for trading stock option such as trading stock in some broker ,and all other fee is zero.There is a put option,exercise price is 2.5 USD, option premium is 2 USD,i have only 10000 USD cash in my account.let's have a discussion on the classic short cash-secured put strategy. 1.Can i short put 200 contracts? 10000/(2.5-2)/100 = 20000/100 =200 contracts 2.If the option premium rise to 5 USD,what will happen? For a put option ,it is nonsense that option premium is larger than its exercise price.But if the trader have large amount money ,they can buy it at any price. On April 21, 2020, the price of May WTI crude oil futures on the NYMEX fell to -$37.63 per barrel. It is possible that the option premium rise to 5 USD. So when the option premium rise to 5 USD in this case,my account will be forced liquidation and all cash lost? The earning in my account maybe is 200*(2-5)*100 = -60000? Or i can just do nothing ,waiting someone to exercise the put option?

External answer — Personal Finance Stack Exchange Author: Hart CO Original post: https://money.stackexchange.com/a/163004 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're right, it is nonsense for a short put to have premium in excess of its strike, anyone paying more is throwing money away. This is because the floor is $0. The shares can't go negative. There are cases where people pay a little over intrinsic value to exit a short put in order to avoid assignment, but you won't find people paying $5 for a put with $2.5 strike (2.5p). Your math is correct, you would need $50 of capital per short put if there were no fees at all for opening/closing/taking assignment and cash-secured. Though very unlikely, if the price of the 2.5p went to $5, you wouldn't be able to buy them back to close, you'd have to hold until expiration/assignment. Some futures contracts require physical delivery of the commodity, and those can go negative because of the logistics/costs involved with physical delivery. In your example, there was a supply glut already, then oil demand dried up. Storage facilities filled quickly, and some people who had no place to put more oil (or traders who never intended to take delivery of many barrels of oil) had to pay someone else to take the oil for them.

External answer — Personal Finance Stack Exchange Author: Bob Baerker Original post: https://money.stackexchange.com/a/163005 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 are not going to be able to sell 200 puts because your margin calculation is incorrect. The CBOE minimum margin for naked puts is the greater of: 20% of the underlying price minus the out-of-money amount plus the option premium 10% of the strike price plus the option premium Brokers may require more. For example, Tastytrade requires a minimum margin of $250 per contract. You have overlooked early assignment. You've maxed out your cash. What happens if you are assigned on your short puts and you don't have the cash to cover? Violation?

External answer — Personal Finance Stack Exchange Author: D Stanley Original post: https://money.stackexchange.com/a/163010 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. 1.Can i short put 200 contracts? Well, shorting a put means selling it, so you don't pay anything up front - so whether you can short 200 contracts depends on the margin requirements of your broker or the exchange. For a put option, it is nonsense that option premium is larger than its exercise price. But if the trader have large amount money, they can buy it at any price. Sure, but why would they pay $5 for the option to sell their stock for $2.50? At worst their stock will be worthless and there's no need to sell it. On April 21, 2020, the price of May WTI crude oil futures on the NYMEX fell to -$37.63 per barrel. That is a different situation - those were physically-settled futures contracts that required someone to actually deliver or store the oil that was purchased. (look up other questions on this site to see why they actually went negative) With stocks, there is no storage or carry costs, so there's no plausible scenario in which one would have to pay to store or transport them. It is possible that the option premium rise to 5 USD. No it's not. The premium of a put will not go above the strike price.