What happens if we don't sell stock options on expiry?
1. In the case of a call option: A call option gives the holder the right, but not the obligation, to buy the underlying stock at a predetermined price (strike price) within a specified period (until expiration). If you let a call option expire without exercising it or selling it, it simply becomes worthless.
In the case of options contracts, you are not bound to fulfil the contract. As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller. You don't have to pay anything else.
If an option expires in-the-money, it will be automatically converted to long or short shares of stock in the associated underlying. Long calls are converted to 100 long shares of stock at the strike price.
As an option approaches expiry, the contract holder must decide whether to sell, exercise, or let it expire. Options can be in or out of the money. When an option is in the money, it can be exercised or sold. An out-of-the-money option or an at-the-money option will expire worthless.
Futures contracts need to be settled before the expiration date to avoid penalties. However, there is no penalty on not settling an options contract before the expiration. You can simply let the contract expire if you wish not to buy or sell the asset.
Execute the option: On expiry day, if the stock price is favorable, you can choose to exercise your call option, buying Company XYZ's stock at the strike price. Alternatively, you can sell the option contract itself in the market if it has gained value. Manage the risk: It's essential to manage your risk.
Expiring worthless is one of the most common terms used in options trading. Options expire worthless whenever they go into expiration out of the money. When this happens, the options simply disappear from your trading account and cease to exist.
Assuming you stay employed at the company, you can exercise your options at any point in time upon vesting until the expiry date — typically, this will span up to 10 years.
In general, 30-90 days is the “sweet spot” for most options trading strategies. If you're correct and the price of the underlying goes exactly where you expected, you're rewarded with quick profits. If the position doesn't work, you don't have to wait until expiration.
Reduced ISO tax implications: To qualify for favorable tax treatment for ISOs, you need to hold your shares for one year after exercising them and two years after you're granted the stock options. By exercising your stock options early, you can get a head start on the one-year holding period.
What is the option expiration risk?
Expiration risk refers to the potential of creating a large, unhedged position in an underlying due to the exercise/assignment process at expiration. If our risk team determines that an account is subject to expiration risk, then the option(s) position may be closed out before the market close on the expiration day.
Fresh buy positions or long positions in the OTM stock options in the last two days of expiry (i.e. Wednesday and Thursday) are not allowed since the contracts can become due for physical settlement. However, clients are allowed to exit the open short positions for the quantity they hold.
Once an option reaches its expiration date, it either gets exercised if it is ITM or expires worthless if it is ATM or OTM. There are no provisions for extending the expiration date for these types of options.
However, if they buy or sell a 0DTE option and it expires worthless, it will not count as a day trade.
Many professional traders trade actively in the first hour or two of trading and take the middle of the day off. This is the best time of the day for trading options for experienced and skillful traders. They may come back for the last hour or two of trading.
If the amount of money profited by selling the shares is greater than the price paid for the call option, the call option buyer makes money. A short call that expires in-the-money will result in assignment, and ultimately a short stock position.
Myth Busted!
The truth actually is that "Only About 30% of all options expire worthless".
Any options out of the money would end up expiring worthless, and therefore the sellers of those options (both on the puts side and the calls side) would be the ones cheering their profits.
Buyers of an option position should be aware of time decay effects and should close the positions as a stop-loss measure if entering the last month of expiry with no clarity on a big change in valuations. Time decay can erode a lot of money, even if the underlying price moves substantially.
Holding an Overnight Position comes with several risks. These include gap risk, where a significant difference between the closing price of one trading day and the opening price of the next can occur. Also, unpredictable market conditions due to after-hours news or events can impact the value of the held position.
What happens if there are no buyers for my options call?
If you put something up for sale and no one buys it, then it is worthless. If there are no buyers for your options call, you will not be able to sell the option and you will be left holding the position.
There's a common misconception that options trading is like gambling. I would strongly push back on that. In fact, if you know how to trade options or can follow and learn from a trader like me, trading in options is not gambling, but in fact, a way to reduce your risk.
As options approach their expiration date, they lose value due to time decay (theta). The closer an option is to expiration, the faster its time value erodes. If the underlying asset's price doesn't move in the desired direction quickly enough, options buyers can suffer losses as the time value diminishes.
Basics of Option Profitability
A call option buyer stands to profit if the underlying asset, say a stock, rises above the strike price before expiry. A put option buyer makes a profit if the price falls below the strike price before the expiration.
It is almost always best to trade out of in-the-money options before the closing bell on the expiration day. If no action is taken, both long options and short options are converted into 100 shares of stock. The cost and risk of this stock can be much greater than the cost and risk of the original option position.
