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Deep in the Money Options Expiring--What Happens?
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Deep in the Money Options Expiring--What Happens?

  #1 (permalink)
Trading Apprentice
Las Vegas NV/Clark
 
Futures Experience: Intermediate
Platform: IB
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Deep in the Money Options Expiring--What Happens?

I have two deep in the money Visa calls. If they were covered calls and they expired in the money, the stock would be called away.

But what happens if I'm not "covered" and I just let the options expire? Do I have to sell the stock to someone? It's been a while and I don't remember exactly what happens.

Thanks

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  #2 (permalink)
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  #3 (permalink)
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I find your wording a little odd. Are you long or short the calls?

If long, then you either need to exercise the options or sell them. Some brokers might auto-exercise in which case you would need to have sufficient capital in the account for the full purchase price at the strike price of the call.

If you are short, then you will most likely have to deliver the stock to the counterparty. I doubt anyone will let an option like that expire, but it may happen. Not sure about the actual mechanism of delivering the shares to the counterparty, but in any case, you would need to have enough money in your account to buy the stock at market. That is why you have margin on the position.

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  #4 (permalink)
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grausch View Post
I find your wording a little odd. Are you long or short the calls?

If long, then you either need to exercise the options or sell them. Some brokers might auto-exercise in which case you would need to have sufficient capital in the account for the full purchase price at the strike price of the call.

If you are short, then you will most likely have to deliver the stock to the counterparty. I doubt anyone will let an option like that expire, but it may happen. Not sure about the actual mechanism of delivering the shares to the counterparty, but in any case, you would need to have enough money in your account to buy the stock at market. That is why you have margin on the position.

I'm long the options. So, if I let them expire I'll have to buy the stock at the option strike price. I think I've got it now. Thanks.

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  #5 (permalink)
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you purchased the calls so you have wright you are not obligated to buy the stock you can just sell the options before expireing

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  #6 (permalink)
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"right"

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  #7 (permalink)
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TGoat View Post
I'm long the options. So, if I let them expire I'll have to buy the stock at the option strike price. I think I've got it now. Thanks.

No, I am afraid your interpretation is not correct.

You have a couple of options at this point:
1. Do nothing / let the options expire - Since you did not inform your broker, your broker will then do one of the following: a) Let the options expire. These become worthless and essentially you are left with nothing; b) sell them in the market. If there is bad liquidity, these could be sold at unfavourable prices; or c) exercise them and you then sit with the underlying stock if you have enough cash.

2. Exercise the option - Phone your broker and inform him that you want the stock. They'll exercise and any you buy the stock at the exercise price.

3. Sell the option at market - With bad liquidity, you will lose some of the value of your option.

4. Exercise & simultaneous sell - I believe some brokers off this option. If you have insufficient cash, you can then execute both at the same time and avoid the hit you take due to bad liquidity on the options. However, the underlying needs to have sufficient liquidity for you to sell without taking a hit there as well.

Regarding 1 above, if do nothing I believe that your broker is under no obligation to do anything. I have seen auto-exercising once, but am not sure if other brokers do this. Also, I think some brokers will automatically sell the option and not exercise. Really, I think this depends on your broker's policies.

If you don't instruct your broker, you may lose the entire investments. Just give him a call.

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  #8 (permalink)
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TGoat View Post
I have two deep in the money Visa calls. If they were covered calls and they expired in the money, the stock would be called away.

But what happens if I'm not "covered" and I just let the options expire? Do I have to sell the stock to someone? It's been a while and I don't remember exactly what happens.

Thanks

As was stated buying an option gives you a right....selling an option gives you an obligation. But the 2 positions you describe are different. The long call you bought can be sold anytime up to Fri close before expiration for profit. If you let them go to expiration your broker will most likely auto exercise for you and you will wake up with a long equity position x's 100 for each 1 lot you bought....in this case if you have the available capital they are yours to keep or sell when the markets open back up. If you do not have the capital you will usually have 2-3 days to liquidate (sell) the position on the open market or add funds to cover the capital requirement.

However a covered call is a short call position covered by a long stock position. If you let this go to expiration while ITM it will be exercised and your long shares will be called away giving you max profit on the position. However you can also roll the short calls to the next expiration before they expire to collect more credit if you choose to keep the position open...or you can close the entire position to lock in profit before expiration.

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  #9 (permalink)
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Thanks to all for the responses.

I can't believe that letting the options just expire will lose your entire investment, but if you guys say that could happen I believe you.

I'll probably just sell them sometime before expiration and be done with it.

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  #10 (permalink)
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TGoat View Post
Thanks to all for the responses.

I can't believe that letting the options just expire will lose your entire investment, but if you guys say that could happen I believe you.

I'll probably just sell them sometime before expiration and be done with it.

Owning the contracts gives you the right to sell them or buy the stock at the strike price. It's a contract....to do with as you please. Like a coupon for a 2$ pizza....if you don't use it or sell it before it expires it isn't of any use to anybody.

However most brokerages will auto exercise any contracts that are in the money at 4pm Fri of expiration...even if you don't have the money to cover the position...and then give you 2-3 days to liquidate or add cash to hold the position...so that you don't lose your entire investment....what else could you ask for?

I never take an option to expiration unless it's worthless. I always take profits before expiration...usually 7-10 days before expiration, if possible, to avoid the spike in Gamma risk.

Selling or buying them back before expiration for a profit is is what most of us try to do....that's the goal most of the time.

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