Stocks & Commodities V. 26:8 (68): Explore Your Options by Tom Gentile
Product Description
Explore Your Options by Tom Gentile
AUTOEXERCISE EXPLAINED
If I hold a call option into expiration and I do nothing, what happens? Will it expire no matter what, or do I need to tell my broker to sell it?
If you don’t close an option position before expiration, two things can happen depending on whether the option contract is in-the-money (ITM), at-themoney (ATM), or out-of-the-money (OTM). Remember, an OTM call option is one where the strike price is higher than the stock (index, exchange traded fund [ETF], or futures) price. An OTM put has a strike price below the current stock price. An ATM option has a strike price equal to the stock price.
OTM and ATM options expire worthless. They have no embedded value and there is no incentive for the holder to exercise that option. If I hold an XYZ call option with 50 strike price and XYZ is trading at $49 a share, why would I exercise an option to buy XYZ for $50 when I can pick it up in the market for $49 a share? On the other hand, if the stock is trading for $51 and I hold the XYZ 50 put option, there is no reason for me to exercise that put and sell shares for $50 when the market will buy it for $51. There are instances when slightly OTM options are exercised by the holder, but in most cases OTM and ATM options will expire worthless because they have no real or embedded value.
AUTOEXERCISE EXPLAINED
If I hold a call option into expiration and I do nothing, what happens? Will it expire no matter what, or do I need to tell my broker to sell it?
If you don’t close an option position before expiration, two things can happen depending on whether the option contract is in-the-money (ITM), at-themoney (ATM), or out-of-the-money (OTM). Remember, an OTM call option is one where the strike price is higher than the stock (index, exchange traded fund [ETF], or futures) price. An OTM put has a strike price below the current stock price. An ATM option has a strike price equal to the stock price.
OTM and ATM options expire worthless. They have no embedded value and there is no incentive for the holder to exercise that option. If I hold an XYZ call option with 50 strike price and XYZ is trading at $49 a share, why would I exercise an option to buy XYZ for $50 when I can pick it up in the market for $49 a share? On the other hand, if the stock is trading for $51 and I hold the XYZ 50 put option, there is no reason for me to exercise that put and sell shares for $50 when the market will buy it for $51. There are instances when slightly OTM options are exercised by the holder, but in most cases OTM and ATM options will expire worthless because they have no real or embedded value.
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