InterDigital Inc (IDCC)

[la-tsla-fan]

Doctor MD: If shares are put to you at or before the put expiration, the ONLY reason for that action would be if the share price has dropped below the put strike price. So you can buy the shares cheaper, but because you sold the put (I think of selling a put as selling insurance), you are obliged to buy the shares at the strike price.

An example will work to illustrate. Suppose you sold 5 puts with a strike price of $50. You might have been paid a few dollars per share for the puts (insurance). If the stock price stays over $50 through put expiry, the puts will expire worthless and you just made yourself whatever the put price was. If, on the other hand, stock price drops below $50, you would have two options:

1. Buy back the puts. Note the put price is made up of two components - inherent value and premium. The inherent value is simply the difference between the stock price and the put strike price. For instance if you sell $50 puts when the stock is trading at $45, there is an inherent value to the buyer of the puts of $5. Premium is the price for the time element. If your puts expire in one month versus three, the premium will be lower. So buying back the puts at zero premium at close to the expiration date may not be such a bad option if you still come out ahead.

2. Buy the stock "put" to you at the strike price, which, as I explained in the first part of this post, is higher than the market price.

I like to use Option 1, but pair it with another put sell at a lower price (therefore lower inherent value) for a further expiration date (higher premium). Often you can do this "rollout" at zero or even a positive price.

If you keep doing this, eventually your sold puts will expire worthless (unless the stock is an absolute dud that goes to zero).

There, that is basically ALL I know.

Oh, one more thing. The zero risk strategy does have a cost. That cost is the opportunity cost of the capital you tie up until the puts finally expire worthless.