Posted by: usset001 | May 7, 2009

Ed’s World Quiz Answer

On April 30, I posted the following question.

When a put option is exercised, the seller of a put…

  1. is long a put
  2. is short a call
  3. is long the underlying futures contract
  4. is short the underlying futures contract
  5. pays the premium

Video Answer:

Text answer follows…

The answer is (c) – the seller of a put option is long the underlying futures contract. The buyer of a put option has bought the right to sell futures. If the buyer exercises the right to sell, who will take the other side of the futures contract? That would be the seller of a put option.

 By the way, the buyer of the future is not necessarily the same individual who originally sold the put. The trader obligated to buy the futures contract will be the oldest seller of the particular put in question. The process of assigning the other side of an exercised option is similar to the delivery process in grains. In delivery, however, it is the seller of futures who has the right to choose to deliver grain, and the “lucky” buyer is determined by the oldest long in the market.


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