Short Options Must Sell When Option is Exercised

When traders take short positions they have assumed an obligation to sell an underlying asset according to the terms of the option contract. The option seller must sell when the option is exercised by the option buyer.

Short positions refer to writing options and agreeing to provide futures contracts for stock or a commodity.  The contract will contain the strike price and the expiration date. When the option holder (person or business buying the option) decides to exercise the option, the writers of short options must close the position by providing what the contract says.

The short call is an obligation to sell. A short put is an obligation to buy. Short options are a bit frightening to option investor newbies. It is easier to accept the concept of long positions as opposed to short positions because going short seems to be the equivalent of being forced to sell your stock.

Short options are often not exercised because there is time value in them until the expiration date. The option holder can sell the option for additional premium even if the option is in-the-money. But even if the short options are exercised, you will earn profit equal to the intrinsic value.

If you are entering the options market, it is important to understand both sides of trading – short options and long options. There are short calls and short puts just like there are long calls and long puts. Each option strategy works best in particular market conditions. That is why you must learn to form an opinion about the direction the market will take.

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• The Synthetic Short Call Matches Stock With Put
• “Borrowed” Stock Short Sellers Include in Options Trading
• The Synthetic Short Stock Options Strategy
• Take the LEAP of Advanced Strategies Options Traders Use
• Consider Volatility When Selling a Short Put
• Calls and Puts Form the Foundation of Options Trading