What Happens at Expiration?

Options expiration is a critical event that every options trader must understand. When an option reaches its expiration date, several things can happen depending on whether the option is in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).

In-the-Money Options

If your option is in-the-money at expiration, it will typically be automatically exercised. For calls, this means you'll buy 100 shares at the strike price. For puts, you'll sell 100 shares at the strike price.

Most brokers have automatic exercise thresholds (usually $0.01 ITM), but you should always verify with your broker.

Out-of-the-Money Options

OTM options expire worthless. If you bought the option, you lose the entire premium paid. If you sold the option, you keep the premium received.

Assignment Risk

If you're short options, you face assignment risk. American-style options can be assigned at any time, though early assignment is rare except in specific situations like dividends.

Key Takeaways

• Know your expiration date and time
• Understand automatic exercise rules
• Consider closing positions before expiration
• Be aware of pin risk for ATM options
• Have sufficient capital for potential exercise/assignment