Options Expiration. A Description

Expiration is approaching, as
it does monthly.  For those who are not
familiar with the process, here is a summary of the important points for you to
understand:

  •        
    Expiration day is
    Saturday, one day after the 3rd Friday of the month.
  •       
    Stock options
    trade until the stock market closes on the 3rd Friday.  They are American style options.
  •        
    Most options on
    broad-based indexes (OEX is an exception) trade until the market closes one day
    earlier, Thursday preceding the 3rd Friday.  These are European style options
    .
  •        
    Options that
    finish in the money by one penny or more are automatically exercised.

o  
If you own one of
these options and do NOT want to exercise, you must tell your broker ‘DO NOT
EXERCISE.’  Do it as quickly as possible
after the market closes. 
If you don’t know how to notify your broker, call now to inquire.  This is important information, and when you
need it, time is short.

o  
If you sold one
of these options and have not repurchased it, you may NOT request that the
option not be exercised.  You should
expect to be assigned an exercise notice, but on occasion an option that's in
the money by only a penny or two may not be exercised by its owner.  When that happens a random selection process determines who 'slides' and is not assigned an exercise notice.

o  
American style
options settle in shares.  The owner of a ITM (in the money)
call option receives 100 shares of stock and pays
the strike price per share.  Some rookies
ask: “What happens if I don’t have enough cash to pay for the stock?”  It doesn’t matter.  The exercise occurs anyway.  If you are unable to hold the stock position,
your broker forces you to sell (or deposit more money in your account). 

The
owner of an ITM put option sells 100 shares of stock and receives the strike
price.  If you don’t own the stock, then
you sell short.  If your account is
unable to hold short stock, then you are forced to repurchase the
shares.
 

BOTTOM LINE: Be aware of these
problems in advance, and sell any ITM option you don’t want to exercise.  It’s better not to wait until the last minute
on Friday afternoon when attempting to sell.

o  
European options
settle in cash.  That makes the process
easy for you.  If you own an ITM option –
call or put – you receive its intrinsic value (the amount by which the underlying
index exceeds the strike price for a call, or is below the strike price for a
put).  Similarly, if you are short an ITM
option, the intrinsic value is removed from your account.

  •        
    To determine
    whether an option is ITM, the settlement price is used.  For stock options, the settlement price is
    the last trade on Friday afternoon.  After-hours trading DOES NOT COUNT.  For
    European style index options, the settlement price is calculated and is not a
    real-time price.  Be certain you
    understand how
    the settlement price is calculated
    because many investors find it
    confusing.
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