Because options will ultimately either expire worthless or in the money, it’s important for options traders to know exactly what happens to options that expire in the money.
For stock options in the United States, one of two things will happen at expiration:
- The option will expire completely worthless out of the money
- The option will expire with some intrinsic value in the money
In order for the option to expire with some intrinsic value, the option must expire in the money. If an option expires out of the money, nothing happens. No shares are assigned and the entire position expires worthless and disappears from the trader’s account.
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What Happens to Options That Expire In the Money?
Simply put, options that are in the money at expiration are assigned.
When an option is assigned, it means the corresponding amount of stock is either bought or sold and then added to the traders account.
Since one put or call option always represents 100 shares of stock, 100 shares will be assigned for every option.
Long Put Options at Expiration
- If a long put option is $0.01 or more in the money at expiration, 100 shares of stock will be sold short at the option strike and automatically added to the traders account
Long Call Options at Expiration
- If a long call option is $0.01 or more in the money at expiration, 100 shares of stock will be purchased at the option strike and automatically added to the traders account
Short Put Options at Expiration
- If a short put option is $0.01 or more in the money at expiration, 100 shares of stock will be purchased at the option strike price and automatically added to the traders account
Short Call Options at Expiration
- If a short call option is $0.01 or more in the money at expiration, 100 shares of stock will be sold short at the option strike price and automatically added to the traders account
Important Things to Know about In the Money Options at Expiration
It is always crucial for traders to be aware of options positions that are expiring.
If a trader does not have enough capital in their account to purchase or sell short 100 shares of stock for every option contract that is about to expire in the money, this will cause a problem.
Most brokers will reach out and kindly ask their clients to close ITM options positions that would cause a negative margin impact. However, don’t rely on this. It’s prudent investing to know what’s happening in your account at all times to avoid unwanted capital situations.
The fee for option assignment or exercise at expiration is something traders should be aware of. Many brokers charge high fees ($20.00) for option assignment/exercise. It is often cheaper to close long or short options that are ITM than to be assigned or elect exercise.
Ally Invest only charges $4.95 for assignment and is a popular choice among options sellers.