What Happens If I Don’t Sell My Options On Expiry? Investors who are just starting out in the stock market tend to focus on two activities: buying and selling shares. They know the most important rule of trading – buy low, sell high – and they rely on analyst ratings and expert research to determine which companies are most likely to succeed within their desired timeframe.
Trading stocks can be lucrative – especially for investors who choose high-quality stocks and allow them to appreciate over time. However, trading stocks typically requires access to capital, and that isn’t always possible for new investors. Fortunately, buying and selling shares aren’t the only ways to make money in the stock market.
Options are a slightly more sophisticated method of generating profit, but they aren’t so complex that they are out of reach for beginners. While there are highly complicated options trading strategies, new options traders can stick with the basics.
Options vs Stocks: What’s The Difference?
Stocks and options both rely on the success (or lack thereof) of an underlying company to determine their intrinsic value, but that’s where the similarities end.
Stocks represent an actual share of the underlying company, and those holding stocks in their portfolios have an ownership interest in the company.
Options don’t offer ownership interest in the underlying company. Instead, they give the holder the right – but not the obligation – to buy or sell shares of the underlying company according to the terms of the contract.
The basic components of an options contract include the number of shares (typically 100), whether the contract holder can buy or sell the shares, the price at which the shares can be bought or sold, and the date the contract expires.
Contract writers sell these options to investors with a premium attached. The premium funds belong to the seller, whether the buyer chooses to exercise the rights afforded under the options contract or not.
Options contracts generally fall into one of two categories: calls and puts. Call options allow contract holders to buy shares of the named company at the price listed if they wish to do so. Put options allow contract holders to sell shares of the named company at the price listed. In both cases, the option to buy or sell is only valid through the contract’s expiration date.
What Happens If My Options Expire?
The premium paid to purchase an options contract is non-refundable. The contract seller keeps that amount, no matter what happens with the option. As expiration dates approach, there are several possible outcomes.
The best situation for options buyers is when an option is “in the money.” That means the predetermined price, also known as the strike price, at which the underlying stock can be bought is lower than the market price (for call options) or higher than the market price (for put options).
Conversely, options are considered “out of the money” when the strike price doesn’t offer the contract holder a profit. That leaves option owners with what amounts to a worthless contract, and their total loss is the premium paid to the seller of the contract.
These are the potential scenarios option traders face as the expiration date approaches.
Long Call Exercise
A long call option allows the contract owner to buy the named stock at a predetermined price by the option’s expiration date. As the expiration date approaches, the next steps depend on whether the option is in the money (ITM) or out of the money (OTM). OTM options expire worthless, and the owner of the contract has a loss in the amount of the premium paid.
When options are in the money, owners can either sell the contract for a premium or exercise the long call. Profits on a long call exercise are the difference between market price and strike price less the premium paid.
For example, a long call option is in the money when its strike price is $150 and the market price of the stock is $160. Exercising the long call gives investors a profit of $10 – the difference between $150 and $160 – less the premium paid for the call.
Long call options are most effective when investors believe the price of a stock will go up. These options preserve the opportunity to buy tomorrow’s stocks at today’s prices.
A long put option allows the contract owner to sell the named stock at a predetermined price by the option’s expiration date. The same ITM and OTM considerations apply. If the stock’s value is at or above the strike price, it is out of the money. The option expires worthless, and the contract holder’s maximum loss is the amount of the premium paid.
If the stock is selling below the strike price, it is in the money. The owner of the option can sell it for a premium or exercise the long put. Of course, exercising the option assumes the contract holder has the shares to sell.
If the relevant stocks are already in the put owner’s portfolio, it’s a simple matter of exercising the option and selling those shares above the current market value. If the put holder doesn’t own those shares already, the next step is to buy shares at the current (lower) market value and sell them for the higher price listed in the options contract.
For example, a long put option is in the money when its strike price is $160 and the market price of the stock is $150. Exercising the long put gives investors a profit of $10 – the difference between $160 and $150 – less the premium paid for the put.
Long put options are popular among investors who believe that a particular stock – or the market as a whole – will decline. However, that’s not the only reason to buy a long put. Investors who have bet on a company by purchasing shares may choose to buy a long put just in case they bet wrong and the stock price drops.
Short Put Assignment
Investors taking short positions on options sell the contracts rather than buy them. When all goes as planned, they sell the contract, collect a premium, and the contract expires out of the money. They keep the premium payments as pure profit.
However, there are no guarantees when it comes to selling options. The value of the contract relies on market conditions and the share price of the underlying company. Those who sell options hope they have predicted the direction of the stock correctly, but no one is right 100 percent of the time.
Contract writers with short puts sold an options contract that permits the contract holder to sell shares at a predetermined price by the contract’s expiration date. If the stock price goes below the strike price, the writer may be required to buy shares at the strike price – and that can lead to significant losses.
For example, a contract writer sells a put option with a strike price of $160 and the market price of the underlying stock is $150. The investor who holds that contract can exercise the option, and the contract writer must buy the shares at $160 though they are worth just $150. That’s a loss of $10 – the difference between $160 and $150 – less the premium received for the put.
Keep in mind that there is no direct or one-to-one relationship between options buyers and sellers. Options holders who choose to exercise their contracts are assigned to a random options writer through an automated process. That adds a bit more complexity to the short put position, as the contract could be assigned at any time – not just at expiration.
Selling put options is considered high-risk for those who don’t already own the underlying stock. It’s one thing to sell shares from an existing portfolio, as gains may already have been realized on the stock. It’s another thing altogether to be forced to buy shares at market prices and then immediately sell them at a loss.
Short Call Assignment
A short call refers to contract writers who sell call options. The profits come when the calls expire out of the money, and the seller keeps the premium. However, as with short puts, short calls put the contract writer at risk of assignment when the call is in the money.
For example, a contract writer sells a call option with a strike price of $150 and the market price of the stock is $160. The investor who holds that contract can exercise the option, and the contract writer must sell the shares at $150 though they are worth $160. That’s a loss of $10 – the difference between $150 and $160 – less the premium received for the call.
The only loss associated with buying options is the premium paid for the contract, which makes long positions suitable for beginning investors. Short options can result in substantial losses unless measures are taken to minimize risk, so short options strategies are more appropriate for experienced investors.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.