A bit of background: I’ve been trading very successfully for two years now, mostly stocks and a few ETFs that track things like oil, financials, and indexes. I’ve also had a paper-trading account that I use to practice trading options. For the most part the options account will mirror my real account, and because my real account is doing well, the options account is doing REALLY well.
But before I’m willing to risk actually money, I need to know what happens when an option (call or put) expires on the third Friday of the month.
So for sake of discussion, let’s say on Jan 4th Caterpillar (CAT) was trading at $58.54 and I think it will go up, so I buy 100 JAN 10 55 for $3.85.
Today JAN options expired and CAT closed at $5.15, so what happens?
I know the “theory” is that I get the option, but not the requirement, to buy 100 shares of CAT at $55, which I could then sell at $60.12.
But what I don’t know is what actually happens. Do I get a call from my brokerage asking me what I want to do? Am I required to make some sort of action before the end of today? If I do nothing do 100 shares show up in my account?
If the option is one that is cleared through the OCC (Options Clearing Corporation) and if it’s traded on one of the regular exchanges it is, I’m pretty sure, then since last June (21st I think) any option that expires $0.01 in the money is automatically exercised unless you give your broker instructions otherwise. That means the exercise price is deducted from your account and used along with the option to acquire the shares in your name. There is a fee for exercise, and if you don’t want the stock, there will be a fee, of course, to sell it. If you do not have sufficient cash in your account then the broker will loan you the money (and charge you interest – three days worth of interest since you can’t unwind the loan until Monday).
I thought brokers were supposed to inform you of pending exercise, but in any case you should definitely contact your broker.
Ha! I was quite surprised when a covered call was executed on my account after a sudden uptick in the price of the underlying stock that I hadn’t expected. (And hadn’t checked.) Never got alerted until I checked my account much later.
I stopped writing options (not because of that incident, I just decided I didn’t have the patience for it) so I don’t know if things have recently changed.
If you have a covered call: bought 100 shares of CAT and sold an option for it. At expiration does it automatically sell your shares for the option price?
And what about put options? Do you automatically sell 100 shares at the end of the period?
Yes, but only if the option is in the money (the current price is higher than the strike price, making it worth it to exercise the option.) If the price at expiration remains below the strike price, then nobody in their right mind would exercise the option, so it disappears, and you keep the premium.
With a put option, you have the option to buy at a particular price on a particular date. I’ve never done puts, so I don’t know if a broker will automatically exercise them at expiration.
I’m an options principal at a major brokerage firm. This information applies only to listed options on stocks. Assume 100 shares of the stock in each contract.
If you write (sell) an option, you can be assigned on the contract at any time up until expiration. It is rare to be assigned prior to expiration, but it can happen. Typically, this would only happen if there is an ex-dividend date approaching.
At expiration, all options that are in the money by one cent or more are automatically exercised. If you have purchased a call option, you will automatically buy the 100 shares at the strike price. If you have purchased a put option, you will sell 100 shares at the strike price.
If you have sold a call option, covered or not, you will deliver 100 shares of the stock at the strike price. If you have sold a put option, you will take delivery of the shares at the strike price.
There are a few exceptions. If you are long (own) a call or put that is very close to being at the money, you can usually ask your broker to NOT automatically exercise the option for you.
Now, your brokerage firm will probably be monitoring your account if you own options contracts in your account. Why’s that? Well, if you own call contracts, you will need to have enough cash or margin buying power available to take delivery of the shares. If you own put contracts, you need to be able to be short the stock or have the number of shares in your account that you will be selling upon assignment. Retirement accounts are watched very carefully as there is no margin available and you’re limited in the amount of cash you can put in the IRA.
Your brokerage firm can and will close out long option positions if your account does not have the cash to handle option assignment.
The average retail investor should consider closing out long positions prior to expiration. There is serious risk involved involved in getting assigned on option contracts. The share price can drop over the weekend, especially over a 3 day weekend like this one.
Always assume you’re going to be assigned if your option is at or in the money on expiration Friday.