Options expiration can be confusing for new traders. What happens to your options at expiration depends on whether they are in the money or out of the money, and whether you are long or short the position. Let us break down exactly what occurs.
The Three Possible Outcomes
When an option reaches its expiration date, one of three things will happen.
1. The Option Expires Worthless
If your option is out of the money at expiration, it expires worthless. You lose the entire premium you paid for the option. There is no action required on your part. The option simply disappears from your account.
2. The Option is Automatically Exercised
If you own an option that is in the money by $0.01 or more at expiration, most brokers will automatically exercise it. This converts your option into a stock position. Calls become long stock, puts become short stock.
3. You Are Assigned
If you sold an option that is in the money at expiration, you will be assigned. Call sellers must deliver 100 shares of stock. Put sellers must buy 100 shares of stock. This happens automatically.
Important: The automatic exercise threshold is typically $0.01 in the money. However, you can contact your broker before expiration to request different handling if needed.
What Happens to Call Options
Call options give you the right to buy stock at the strike price. Here is what happens at expiration based on where the stock is trading.
Example: Long Call at Expiration
You bought a $50 call option on XYZ stock.
- If XYZ is at $55: Your call is in the money. It will be automatically exercised. You will buy 100 shares at $50, spending $5,000. Your account now holds shares worth $5,500.
- If XYZ is at $50: Your call is at the money. It expires worthless unless you specifically request exercise.
- If XYZ is at $45: Your call is out of the money. It expires worthless. You lose the premium paid.
What Happens to Put Options
Put options give you the right to sell stock at the strike price. The dynamics are opposite to calls.
Example: Long Put at Expiration
You bought a $50 put option on XYZ stock.
- If XYZ is at $45: Your put is in the money. It will be automatically exercised. You will sell 100 shares at $50. If you do not own shares, you will be short 100 shares.
- If XYZ is at $50: Your put is at the money. It expires worthless unless you request exercise.
- If XYZ is at $55: Your put is out of the money. It expires worthless. You lose the premium paid.
Automatic Exercise Rules
The Options Clearing Corporation (OCC) has rules for automatic exercise that apply to all U.S. listed options.
- Options in the money by $0.01 or more are automatically exercised
- You can submit a "do not exercise" request to override this
- You can also request to exercise an out-of-the-money option
- Exercise instructions must be submitted before the deadline, typically 5:30 PM Eastern
These rules exist because it would not make sense for someone to let a valuable in-the-money option expire without capturing that value. However, there are situations where exercising might not be desirable, such as when you lack the capital to take the stock position.
What Short Option Sellers Face
If you sold options, expiration works differently. You have obligations rather than rights.
Short Call Assignment
If you sold a call that expires in the money, you will be assigned. You must deliver 100 shares at the strike price. If you own the shares (covered call), they will be sold from your account. If you do not own shares, you will be short 100 shares come Monday morning.
Short Put Assignment
If you sold a put that expires in the money, you must buy 100 shares at the strike price. Make sure you have the buying power in your account to handle this purchase.
Capital Requirement: A single short put at a $50 strike requires $5,000 in buying power when assigned. Make sure your account can handle assignment before selling options.
The Settlement Process
Options that are exercised or assigned on Friday settle on the following Tuesday (T+1 for the stock transaction). Here is the timeline.
- Friday: Options expire, exercise and assignment determined
- Saturday: Assignment notices processed
- Monday: Stock positions appear in your account
- Tuesday: Stock settlement occurs
During this period, you may see temporary margin impacts as your broker accounts for the pending stock transaction.
After-Hours Risk
One of the biggest risks at expiration is after-hours stock movement. Options stop trading at 4:00 PM Eastern, but the exercise decision is based on where the stock is at the end of the settlement period.
After-Hours Risk Example
You sold a $100 call on ABC stock. At 4:00 PM, ABC is at $99.50 and your call appears safely out of the money. However, ABC announces news after hours and jumps to $102. Your call is now in the money and you will be assigned, even though it looked safe when trading ended.
This is why many traders close positions before expiration day rather than letting them expire.
Spreads at Expiration
If you have option spreads, expiration can be complicated. With vertical spreads, you might have one leg in the money and one leg out of the money. This can result in unintended stock positions.
For example, if you have a call spread with a long $50 call and short $55 call, and the stock closes at $52:
- Your long $50 call is exercised - you buy 100 shares
- Your short $55 call expires worthless - no action
- Result: You now own 100 shares of stock
Many traders close spreads before expiration to avoid these situations, even if it means giving up some remaining profit potential.
Best Practices for Expiration
Here are guidelines for handling expiration professionally.
- Close positions early: Consider closing positions the day before expiration to avoid after-hours risk
- Know your capital requirements: Make sure you can handle assignment if it occurs
- Set alerts: Track positions approaching expiration so nothing surprises you
- Understand your broker's rules: Each broker may have slightly different procedures
- Watch for dividends: Dividend capture can trigger early assignment on calls
Never Miss an Expiration
Pro Trader Dashboard tracks all your options positions and alerts you before expiration. See exactly which positions need attention and manage your portfolio with confidence.
Summary
Options expiration is straightforward once you understand the rules. In-the-money options are automatically exercised, out-of-the-money options expire worthless, and short option sellers face assignment on in-the-money positions. The key to managing expiration well is planning ahead, understanding capital requirements, and closing positions when the risks outweigh the rewards of holding through expiration.
Learn more about managing expiration with our guides on options assignment and rolling options positions.