Newbie asks - How to enter when PUT Option is assigned, i.e. one ends up buying the underlying stock for more than market price

[Suresh Bazaj]

Folk,

 

            This question is related to an earlier thread on buying back PUT
options (Buy To Close) before the expiry date. I am 

 

            Another scenario can occur when the PUT seller loses the bet
(i.e. the PUT Buyer wins). If the underlying stock price drops significantly
below the PUT strike price, then the seller is required to buy the stock
(i.e. the stock is assigned to PUT seller) at the strike price.

 

            The only consolation in this case is that the net cost of the
stock = option strike price - option sale price.

 

            For example, if one sells 1 PUT at a strike price of $20 for $2
then the person is betting that the stock price will stay above $20, so no
one will want to sell it for $20.

 

            Now, if the stock price drops to $15, then the PUT seller is
obligated to buy the stock at $20. The net cost to the seller is $18 per
share (still higher than $15).

 

            Each PUT option is for 100 shares. So, in the above scenario,
the seller collects $200 (ignoring commission and fees) when the PUT is
sold. The cash received is added to the checking account and the
corresponding double entry is a Liability of $200.

 

            When the PUT is assigned, $2,000 is taken out of the checking
account and the corresponding double entry is for the stock under Assets.

 

            In addition, the liability for the PUT is decreased by $200 and
the corresponding double entry is for the stock under Assets which reduces
the cost basis of the assigned stock to $1,800 ($2,000 - $200).

 

            Am I doing it right? Please confirm or correct me.

 

Thanks,

 

Suresh