Put option question?

...(please note that I am still learning the process here...)

Let's assume I purchased a put option in a company (say, XYZ)---and I were to purchase 1 contract at 15.00 May 2008 for $1 ....could I execute the trade itself if the stock IF that stock fell below $10 a share before the expiration date---(knowing I don't have the money to actually purchase the stock and resell it back on the open market?).

I know this zero sum investing----but if I don't have 3500 to purchase the stock, could I still execute the trade regardless?(shorting?)

I know I need to attend a class (and I plan to)...but I was just curious if I could do this. I know I can close my position out (or let it expire--which wouldn't be wise considering the put option would be valuable at that point).

Please let me know your thoughts....thank you!

I think part of the problem people have had answering your question is that parts of it are confusing. After you buy the put option the position will eventually be closed one of three ways:

(1) The option is exercised, selling 100 shares of the stock for $1,500. After you exercise an option it no longer exists.

(2) The option could expire.

(3) You could sell the option with a "sell to close" transaction.

The first problem with the quesiton is that the phrase "execute the trade" could mean either (1) or (3) and it is not clear which you mean.

The second problem is the phrase "IF that stock fell below $10 a share" is irrelevant.

The third problem is the phrase "if I don't have 3500 to purchase the stock" does not make sense. One option contract is for 100 shares, so if you needed $3,500 to buy the stock the stock would have to be trading for $35 per share. If the stock was trading at $35 per share it would not make sense to want to buy it in order to sell it at $15 per share.

With this background, I'll go on to your actual questions.

First, as others noted, you can always sell the option (without ever exercising it) to close your position and realize your profit.

Second, if you want to exercise the option you will sell the stock for $15 per share. If you want to buy the stock first and then sell it by exercising the option, you will need enough margin to buy buy the stock, $1,000 if the stock is trading at $10.00 per share. If you want to excercise the option first, shorting the stock, you need enough margin to cover the short position, 150% of the value of the stock at most brokerages. If the stock is trading at $10.00 per share that would mean you would need $1,500. If you exercised the option to sell the stock at $15 per share the transaction would net $1,500 cash so you would have enough cash to cover your margin requirement.

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I will also second Ron Berue's recommendation for

http://optionseducation.org

as a source of good basic options information. I do believe that you should also read at least one good book on options as well before you begin trading, but it is a lot easier to choose a good book after you have a little more background.

You cannot purchase a put unless you own the stock or if you are authorized by your broker to sell short. However, you can sell the put prior to it expiring and keep the profit after broker fees.

That first answer is completely wrong. You can buy options, either puts or calls, with the lowest level of broker authorization.

You can buy a put and then either exercise the option by then delivering the stock and receiving the strike price OR you could just sell the put option prior to expiration. The gain from simply selling the option will be nearly identical to that from exercising the option by delivering the stock.

From your scenario and the way you explained it, you "want to have your cake and eat it, too."
OR
Perhaps I missed something.

Sorry, "On Wall Street, there aren't any gifts."

You "get more bang for the buck" trading options.

Options have the element of time decay going against you.

The losses are already known. A trader KNOWS he/she cannot lose any more than the cost of the option.

To learn more about options trading, here's a free AND VERY helpful site:
http://optionseducation.org

That site basically "spoon feeds" those folks who would like to learn more about trading options.

Thanks for asking your Q! I enjoyed answering it!

VTY,
Ron Berue
Yes, that is my real last name!

you can buy and sell puts and calls without having the capital to exercise the put.

You can buy / sell at anytime. You don't have to wait for the expiration. You also don't have to wait for them to be "in the money".

For example, a week ago GOOG $500 calls would probably have traded for $0.10, but before their earnings call, there was more activity, and could have cost $1.00. If you bought a week ago at $0.10, you could have sold yesterday for $1.00 each even while GOOG stock was at $450 - way out of the money.