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Question: Investing in indexes, cash settled?

(Posted by: Drew M on 2010-06-30 21:22:30)

Hi, I was wondering when you buy options over an index, say puts over the Dow Jones, where does the money come from if it is cash settled? That is does it come solely from people on the other side, ie in this example people who have calls on the Dow Jones. Thanks

Posted by: zman492 on 2010-07-01, 00:16:13

< < <I was wondering when you buy options over an index, say puts over the Dow Jones, where does the money come from if it is cash settled? > > > If the holder of a cash settled option exercises the option the money comes from someone who wrote (sold) the same option. < < <does it come solely from people on the other side > > > Yes < < <in this example people who have calls on the Dow Jones. > > > No. The other side of a long put option is a short put option, not a long call option. For every long option held in one account there is a short option with the same type (put or call)underlying, strike and expiration in someone else's account.