What Occurs When Options Expire In The Money?

Options grant the holder the right and not an obligation to sell or purchase a stock at a specific price and time. The specified price is the strike price. Fortunately, the holder can exercise the option at any given time before it expires, irrespective of how its market price is close to the strike price.

Remember, the difference between the option’s current value and its strike price matters a lot. But if options expire in the money what happens?

In our guide to what happens if options expire in the money what happens, we’ll answer the question, “Stock options expire what happens?” We’ll also show you when call options expire.

In The Money Options Expiration: A Comprehensive Guide to the Final Outcome

Generally, these two things can happen to an option on the expiration date:

  • The cost of the security may be higher than its strike price.
  • The cost for the option can be lower than its strike price.

These two outcomes have different repercussions; you can either lose some cash or make a profit. But it’s always advisable to sell or buy the option before it expires. And in our case, we’ll focus on when it expires while in the money, which means the market price of the put option is higher than the strike price.

Call Options

You can profit if the call option’s market price exceeds its strike price. To determine your gains, you’ll have to calculate the price difference and then subtract the cash you paid for the option. Finally, multiply this figure by the 100 shares.

Exercising a call option lets you purchase the stocks for a lower price than their actual price. So when it’s in the money, you can lock in the value by selling the call option or getting the shares.

Put Options

On the other hand, a put option is the opposite of a call option. You can make cash when the price of the security is lower than the strike price of the put option. In this situation, the put option is in the money and worth exercising.

So if the options expire in the money, what happens? Well, the answer is simple… when options expire while out of money, they no longer exist, and if, in cash, you get the shares. Options expire worthless when out of money.

So can you sell options before they expire? Yes, in fact, it’s advisable to do so, especially if it’s out of money. But make sure you know when does option expire on Friday since it’s different from the regular days.

The Impact of Options Expiring In The Money on Traders’ Portfolios

Now that we have talked about the meaning of put and call options in the money, we should talk about what happens when in the money options expire. There are two types of options (European and American options) with each having different effects on your portfolio.

European Options: What Happens When SPX Options Expire in the Money?

The options on indices like NDX and SPX are usually styled in a European manner. They have the following characteristics:

  • These options can only be cash-settled
  • They don’t offer stocks when they expire
  • European options can never be exercised earlier

Since you won’t get any stock when it expires, what happens when the money option expires? Well, when European options expire, a cash transfer is conducted between the short and long parties.

For instance, if you purchased the option at $4,300, and it expires at $4,305, then the call value is $5. In this situation, the short party will deliver $500 on the contract instead of 100 shares.

American Options At Expiration

Typically, European options are indices, while American-style options can be everything ranging from equities to ETFs. Some of its main characteristics include:

  • You can exercise these options early.
  • These options offer stocks instead of cash.
  • They can be settled by physical stocks.

When the American option expires while in money, you get some physical shares; this means buying the shares at a lower price than the current market price.

Maximizing Profit: Strategies for Managing In The Money Options Expiration

Before we talk about the strategies for managing these options, you should know that it’s always good to exercise them before expiration. But when do call options expire? We’ll have these options expire at 11:59 am on the expiration date. You are allowed to exercise it by 5:30 pm on the day before the option’s expiration date.

But once it expires, you will have to deliver the stocks in person, and you can either keep the stocks or sell them. Remember, you will get the 100 shares at a lower price, which means more profit.

But if you believe that its value will continue increasing, you can hold the 100 shares and sell them later. After the option expires, and you can’t exercise it, you should wait for the next day, and once you receive the 100 shares, you can sell them instantly.

Understanding What Happens When Options Expire Worthless

When options expire out of money, then they become worthless, which means that they will disappear from your account. After all, it doesn’t have an intrinsic value; therefore, it will be useless to the owner. So the contract holder gains some cash while you lose the premium you paid for the option.

A call option can become worthless if the strike price is higher than the market value of the underlying stocks. Therefore, you won’t receive the 100 shares and lose the cash paid for the contract.

Selling Options Before Expiration and Their Impact on Profitability

Options tend to lose their value as the expiration date approaches. Therefore, if you know when does stock option expire, then you can sell before the expiration date. If you know when the stock option expires, then you can sell it earlier, especially when it’s out of money.

Remember, you can’t sell it between 5:30 pm the day before it expires and 11:59 am on the expiration date. This means that its price can still be affected by the market and may drop in value. Therefore, it’s crucial that you exercise the options earlier.

If you are out of money, selling it before the expiration date can help you lower your losses.

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