What Happens If Call Option Expires

In the early days of options trading—two or three decades ago—for market makers in the options trading pits in Chicago and other fiscal centers, there was i twenty-four hour period a month in which omnipresence was virtually mandatory: the day earlier options expiration because book was ordinarily heavy and the potential for volatility was ever-nowadays. In short, trading options on expiration day was seen as a time of opportunity and risk.

Although it’southward get a more frequent occurrence, the last day of trading tin can all the same be a time of volatility as well as potential opportunity.

If you’re new to options, and you don’t quite understand all the terminology and logistics, and so expiration can likewise be a time of peril. Here are a few things yous need to know to avoid potential pitfalls and better empathise the ins and outs of expiration twenty-four hours.

Some Basic Lingo

Option holder. The heir-apparent (“owner”) of an American-mode option has the right, but non the obligation, to practise the option on or before expiration. A call option gives the owner the correct to purchase the underlying security; a put option gives the owner the correct to sell the underlying security.

Choice writer. When you sell (“write”) an American-mode choice (telephone call or put), you may be assigned at any fourth dimension, especially the underlying nugget if your pick is in the money (ITM) on or before expiration 24-hour interval (and even slightly out of the money [OTM] in special cases described below). The option seller has no control over consignment and no certainty equally to when it could happen.

Options intrinsic value. This is the difference between a strike and the underlying’southward electric current price. Suppose a stock is trading for $51 and a l-strike call option is worth $i.40. The intrinsic value would be $1, the corporeality by which it’s ITM. The extra $0.forty is known as extrinsic value, or fourth dimension value. OTM options consist simply of extrinsic value.

What Are the Terms? American or European? Greenbacks or Concrete Delivery?

American-way options
can be exercised anytime before the options expiration date, and options contract settlement requires bodily delivery of underlying stock, whereas
European-fashion options
tin only exist exercised at expiration. Standard U.S. equity options (options on single-name stocks) are American-style. Options on stock indexes, such as the Nasdaq-100 (NDX), S&P 500®(SPX), and Russell 2000 (RUT), are European-style.

Also, equity options are not greenbacks-settled—actual shares are transferred in an practice/assignment. Broad-based indexes, however, are cash-settled in an amount equal to the difference between the settlement price and the strike price times the contract multiplier. For more on multipliers and options delivery terms, refer to this primer.

Settlement and Triple Witching

Each quarter, on the third Friday in March, June, September, and Dec, contracts for stock index futures, stock index options, and stock options all expire on the same day. This so-called “triple witching” may lead to order imbalances and increased volatility.

Almost index options, such as SPX, NDX, and RUT, settle Fri morn but stop trading on Th afternoon (before the tertiary Friday of the month). But the settlement toll isn’t determined until Fri morning. The monthly
option AM settlement
isn’t based on the opening price of the index but rather on the price determined past the opening trade price in each stock that comprises the alphabetize. This is known as “the print.”

What if a marketplace-moving event happens between Thursday night and Friday morn?
Print gamble
is the overnight chance in AM-settled options.

PM-settled options, such equally weekly options, trade until the end of the twenty-four hour period Friday and settle based on the endmost value of the underlying security. On the last trading day, trading in an expiring PM-settled option closes at 3 p.m. CT for options on single-name equities. Options on equity indexes (cash-settled) expire at 3:xv p.k. CT.

Did You Know?

Expiring options will be automatically exercised if they’re ITM by $0.01 or more every bit of the 3 p.m. CT cost (for disinterestedness options) and three:15 p.1000. CT (for options on indexes). In general, the option holder has until 4:30 p.m. CT on the terminal trading day to do the contract. These times are set past the Options Immigration Corporation (OCC), the fundamental clearing business firm for the options market. Merely some brokerage firms might take an earlier cutoff than the OCC threshold.

If your long option is ITM at expiration, but your account doesn’t have plenty money to support the stock position, your broker may, at its discretion, choose not to practice the option. This is known equally
DNE
(do non exercise), and whatever proceeds you may take realized past exercising the pick will exist wiped out. A banker may also, at its discretion, shut out the position. OTM options expire worthless.

Expiration Checklist: Manage and Monitor Your Expiration Adventure

Everybody loves a long weekend, but if you lot’ve always taken an unwanted position into the weekend due to an options expiration mishap, that fourth dimension betwixt Friday expiration and the Monday open tin feel like a painful, gut-wrenching eternity.

Now that you’ve been introduced to the lingo and logistics, here’s a list of things to know, bank check, and maybe double-cheque as you go into expiration.

Do your research
: Are there news alerts like earnings or company announcements on a company in which yous concord expiring options?

Some other fun fact: TD Ameritrade volition not charge you a committee to shut out any option priced lower than $0.05.

Check your specs. Do your options settle American- or European-manner? Is settlement in the morning or afternoon? What are the trading hours? Does the underlying trade outside of regular market hours? For example, options that are ITM as of the shut are typically automatically exercised, and OTM options aren’t. However, if the price of the underlying changes after the close, you might have a short selection go from OTM to ITM. The option holder may choose to do, leaving you with an unwanted (or at least unexpected) position. If you have whatever questions, call the TD Ameritrade client support desk at 800-669-3900.

Liquidate (or take enough cash on paw). To avoid whatever margin calls or unwanted overnight or weekend exposure, make certain you lot programme alee for whatever positions yous might acquire on expiration. For example, to practice a long disinterestedness call choice, you need to have enough cash in your account to pay for the shares. Alternatively, if your account is approved for margin trading, you need to concord cash or securities to satisfy the “Reg T” margin requirement. If yous’re unsure, or if you don’t want the position, liquidate before market close.

Get out yourself some time. Unlike some video games, in options trading, information technology’s not always a good affair to be the last person standing. As you get closer to three p.one thousand. CT on the options expiration date, liquidity tin can often dry out up and bid/ask spreads may widen. So, if you’re considering liquidating, or fifty-fifty rolling to some other expiration date, sooner may be better.

Risks and Rewards

Hither’s one terminal particular for your expiration checklist: Know and understand your risk. Figure i shows the risk profile of a long vertical phone call spread, which is created by being long the ninety-strike call and brusk the 95-strike call. Note that if, at expiration, the underlying is below the 90 strike, both options expire worthless, and if the underlying is above the 95 strike at expiration, both options volition exist exercised. In either example, expiration volition non effect in taking a position in the underlying.

FIGURE 1: VERTICAL Call SPREAD Chance PROFILE.
For illustrative purposes only. Past performance does non guarantee future results.

Simply what virtually the area in between the strikes? And, in particular, what almost those points of dubiety right around the 90 and 95 strikes? Will you lot accept a position, or won’t you lot?

If the xc-strike call is ITM and the 95-strike call is OTM at expiration, the lower strike phone call will be subject to automated exercise and the 95-strike call will expire worthless. Therefore, you’d buy the shares for $90 unless y’all close the position by selling the spread prior to expiration. If the underlying is at the points of uncertainty around the 90 and 95 strikes, and y’all don’t want to exercise the contract or get assigned, so y’all’ll likely desire to close the spread earlier expiration.

Desire to run your own options expiration analytics? TD Ameritrade clients tin can exercise exactly that via the
Chance Profile
tool on the thinkorswim platform. With the Risk Profile tool, yous can visualize the potential profit/loss on a trade, adjust parameters, and even add simulated trades and assess the risks.

Now that you’ve been introduced to the language and logistics of expiration, you may be able to arroyo expiration with a greater understanding of the risks and how yous might manage them. Y’all might want to keep this checklist handy just in case.