Introduction
Options are contracts based on other stocks or indices. If you don’t close your option on the expiry date, it’s “out of the money“. You’ll lose the premium you paid for it. With American style options, you lose the full amount. With European style options, you only lose a portion. It’s important to know when your options expire so you can plan your trading strategy.
We’ll explain what happens if you don’t sell or exercise your options when they expire:
- If you don’t sell or exercise your American style options, you’ll lose the full amount of the premium.
- If you don’t sell or exercise your European style options, you’ll only lose a portion of the premium.
What Are Options?
Options are a form of derivative that gives the holder the privilege, but not the responsibility, to purchase or sell an underlying asset at a predetermined cost. Options are traded on exchanges and usually have a maturity date. In this article we will explore what options are, how they operate, and what transpires if you do not exercise or dispose of your options on expiration.
Types of Options
Options are a financial derivative – a contract between two parties that lets the holder buy or sell an asset at a certain price in the future. Options come in two types: calls and puts. A call option gives the holder the right (but not the obligation) to buy the asset before expiry. A put option grants the right to sell.
There are two main types of options: American and European. American can be used anytime before or on expiration day. European options can only be used on expiry day. Also, traded options are cash settled – meaning you will receive (or pay) cash representing your profit/loss on expiry.
When options expire, there are four possible outcomes: money (if Out Of The Money), break even (if At The Money), losses (if In The Money), or nothing (if Out Of The Money). Each outcome requires different action depending on your position and risk management.
Benefits of Options
Options trading can be a good strategy for investors. They can choose between call or put options to get a good risk-reward. Buying options is usually cheaper than buying stocks.
Options give investors control over how much money they can make. For example, buying call options below current price and selling at the strike price makes money. Also, buying put options above current value allows them to hold onto capital if stock prices go down.
Investors have more control when exiting trades. They can use stop loss orders or roll strategies to move positions into new contracts with different expiry dates. This reduces risk of losses should markets change drastically.
What Happens When Options Expire?
Options contracts have an expiration date. This is when they can be bought or sold, and when they will no longer be valid. If the option isn’t exercised or sold before this date, it will expire and become worthless. If you don’t sell your options on expiry, then they will be expired and become worthless.
Out of The Money Options
Out of the Money (OTM) options are contracts whose strike price is above the current market price, if you own a call option. Or, below it if a put option. At expiry, OTM options usually become worthless. No financial gain can be achieved since their intrinsic value was always zero.
The buyer or seller of such an option will see the cost and any premium vanish after expiry. If you don’t sell it before expiration, your capital including premiums will go back to the broker. Trading options entails potential risk.
In The Money Options
Options that are In The Money (ITM) have intrinsic value. This means their strike price is lower than the current asset’s price. As they approach expiry, their value increases. Traders can exercise them to capture their value and gain a profit. Or, they can be held until expiration.
Put options that expire ITM will automatically be exercised if you don’t. This means you must buy back shares at a higher cost than the option contract sold for. Call options that expire ITM should be automatically exercised. Depending on your broker, you may receive an email notification prior to expiry.
What Happens If You Don’t Sell Your Options On Expiry?
Sell your options on expiry – or else! Depending on the type of option, you could experience several different outcomes. Some may expire, being rendered worthless. Others could lead to assignment or a margin call. Let’s investigate these possibilities further.
Intrinsic Value
Options contracts have what’s called “intrinsic value“. This is the inherent value of the stock that was bought. On expiry, if the option contract has any intrinsic value left, it must be sold to capture the underlying value. If not, you’ll have a financial loss.
Intrinsic value can be in any options contract – call or put – if it’s exercised early. To stop losses on expiry date, investors should watch the stock and take action 1-2 days before expiry date.
The loss depends on the difference between the option premium and its intrinsic value when you sell it on expiry. If there is any premium left, this will limit losses. The sooner you trade or close an option contract, the better. Market movement after expiration can cause additional losses beyond the premium received.
Time Value
Options are a great way to invest in the stock market. They allow decreased risk but can still bring great returns. However, they have a limited lifespan and must be acted upon before their expiration date, or they will be worthless.
Options are based on time and have expiration dates. This date decides if they are “in the money” or “out of the money”. Not taking action before the expiration date will mean the option is worthless.
Time is the main factor that affects the value of an option. It tends to decrease towards expiry as liquidity in underlying markets decreases. Time value is affected by:
- how long until expiry
- how far away the strike price is from the break-even point
More time and further distance may increase the option’s time value. Therefore, it may be beneficial to hold onto the option until expiry, if you think the market conditions may improve.
Conclusion
It is essential to analyze all possible results when trading options. One must remember to use their options before the expiration date, or choose not to.
- If the option is in the money, your broker may exercise it and you’ll gain or lose profit. You may need to pay extra funds beforehand.
- If the option is out of the money, it will expire worthless. You will suffer a loss equivalent to the amount you paid for it in commissions and/or fees.
Plan ahead before entering an options trade. Think about your goals and objectives. If you plan to wait till expiration, ensure you have enough capital. Also, consider market changes which could make your position unprofitable. By doing all this, you can reduce the dangers of not selling my options on expiry.
Frequently Asked Questions
Q1: What happens if I don’t sell my options on expiry?
A1: If you do not sell your options on expiry, they will expire worthless and you will lose the entire premium that you paid for the option.
Q2: Can I still buy and sell options after expiry?
A2: Yes, you can still buy and sell options after expiry, but the price will be based on the underlying asset’s current market price and not the option’s expiry date.
Q3: Can I still exercise my options after expiry?
A3: No, you cannot exercise your options after expiry. Once the option has expired, it is no longer valid and cannot be exercised.
