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At 10:40 AM 9/29/98 +0100, you wrote:
>All :-)
>Just a question. If a Blue Chip is worth $300, and you expect it to go down,
>you buy puts. In case the company went to zero, who is then going to pay you
>the money you can claim ?
>
>Any answers will be appreciated, thanks.
>
>:-) Marianne
>
>
Marianne--
The person who sold you the puts, who is obligated to buy the stock at the
strike price of the put, no matter what the market price may be, even zero.
If you had bought Blue Chip puts with a strike price of 300 and Blue Chip
goes to zero, your puts will be "in the money" by 300 points, and your most
practical move would be to sell the puts in the options market for a very
handsome profit. The buyer of the put at $300 could be the person who sold
it to you, who might prefer to "cancel" the put's obligations by buying it
back rather than becoming the owner of Blue Chip stock with a value of
zero. (In actual practice, it is unlikely that the seller of the put and
the subsequent buyer would be the same actual real person. But they would
be persons with the equivalent positions in the market, matched to your
trades by the options clearing house.)
Technically, of course, your puts give you the right to sell BlueChip stock
at the strike price of $300 to the person who sold you the put (calls give
you the right to buy the stock at the strike price, even if the market
price is far above that). But if you don't have the stock in your portfolio
(and you are not obliged to own the stock in order to own the puts) you'd
just sell the puts.
Hope this helps some. It took me a lot longer to get the concept of puts
into my brain than calls, so don't despair.
I had a nice conversation yesterday with a friend who had just returned
from a ten-day trip through Norway and felt it was wonderful. They went
mostly through the fjord country.
Best regards,
Chuck Engstrom
Kennedyville, MD
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