Question on Option Expiration

Posted by made to trade on March 15, 2012 (05:41PM)


I am short a few options that are expiring on March 17th.  The options are close to being ATM.  My question is, suppose at 4PM ET, the option finishes OTM - meaning I should make the premium.  However, what if during the after market hours, the underlying moves and the option ends up being ITM.

Would I be assigned the underlying since expiration is March 17th (not 16th?).

I don't particularly want to close out my position unless I feel that it will finish ITM during market hours as the fees will take away some of my profits.


Posted by made to trade on March 15, 2012 (06:01PM)

Wait, I just read this on  Is this true? 

"Short options valued at 5 cents or less, can be bought to close these positions for no charge (commission free)"

Posted by doougle on March 15, 2012 (06:49PM)

Yes, that's true on TK.  Short options under .05 can be closed with no commission (SEC fee still applies).  It's a good idea to buy them back when they get that cheap.

The settle price (for equity options) is the price at the close on the 16th.  So if something happens after the close, it won't effect your options, but if you are long or short stock as the result of assignment, it would effect your Monday prices.

Posted by made to trade on March 16, 2012 (10:08PM)

Thanks doougle.

Posted by WeirdUncleJesse on March 19, 2012 (05:05PM)

   The above only refers to what happens automatically. Once, I sold options that were otm at market close at the expiration date. However, someone still exercised options that they bought just prior to market close. My options were among those that were assigned by the Clearing House. Lucky me, I made an additional 2-3% profit on the deal :-). 

   Be advised, options can be exercised at *any* time at the whim of the buyer. It matters not at all whether the decision is in the best interest of the buyer. The specific contracts that are assigned to be exercised are randomly chosen by the impatial Options Clearing House. Sometimes you get lucky.

~~Weird Uncle Jesse~~

Posted by TK All-Star on March 21, 2012 (09:44AM)

Hello MTT,

There is a rule that determines the official closing price (or settlement price) for the underlying asset. When that asset is a stock, the official settlement price is the final trade that occurs before the market closes on the 3rd Friday of the month. Thus, those options officially expire worthless.

However, any option owner has the right to exercise an option, even when it is out of the money. For obvious reasons, this does not happen very frequently. Your example represents a perfect situation for which the ‘DO EXERCISE’ notice exists. Therefore, any person who owns call options that move ITM after hours, and who is aware that the stock is trading above the strike in the after-hours market may, if he/she so choose, notify TradeKing (before the official cutoff time, which is approximately 4:30PM ET) to exercise. Thus, there is a chance that you will be assigned an exercise notice in the scenario you describe. But these options are NOT subject to the auto-exercise rule.

Note: Expiration is officially on Saturday, following the 3rd Friday, but the option owner must still submit a DO EXERCISE (or a DO NOT EXERCISE, if the situation calls for that) option before Saturday.

Here is a thought: Buying back your soon-to-expire-worthless options (at $0.05) will indeed cost you that $5 per contract, plus fees. However, the time may come when you will rue the fact that you got into the habit of trying to earn that very last nickel from a trade. Sometimes you can buy that option (to close) weeks before expiration. That can be a lot of safety for only $5.

Mark D Wolfinger
Options for Rookies
March 19, 2012

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