Holding an option through the expiration date without selling doesn't guarantee profits, but may limit loss. In this article, we will discuss, "What Happens When Options Expire? What Is an Options Expiry?" Let's get started.
What Is an Options Expiry?
Options expiry is the last day on which the option may be exercised in compliance with the conditions of the option. Any long option position that is in the money by one cent or more for equity options or by 0.1 points or more for index options will be automatically exercised by CommSec. In general, ASX Clear (formerly Australian Clearing House) lists the series for a minimum of six months for monthly expiries and a minimum of three weeks for weekly options. As one series expires, a new, further away series is created.
The third Thursday of the expiry month, or typically Thursday for weekly options, is when exchange-traded options expire. Should the necessity arise, ASX Clear has the right to alter these dates.
What Happens When Options Expire?
There are two possibilities when it comes to options when they expire:
- The price for the underlying security is lower than the strike price
- The price for the underlying security is higher than the strike price
Let's take a look at what that means for call and put options.
Call Options
When the strike price of a call option is less than the price of the underlying security, the contract holder profits. Take the price difference, then subtract the premium rate to determine the gains. You can divide this amount by the total number of shares. In this case, the option is in the money.
You can purchase shares for a lower price than the going market rate by exercising the call option. The holder of the option has two options as it nears expiration when it is in the money: sell it to lock in the value or exercise it to purchase the shares.
The call option is seen as being out of the money if the underlying security trades for less than the strike price at expiry. The maximum amount of money the contract holder loses is the premium. It would make little sense to exercise the call when better prices for the stock are available in the open market. Therefore, the option holder would be better off selling the option before it expires if it was out of the money.
Put Options
Put options work the other way around. Therefore, the trader makes money when the strike price of a put option is higher than the price of the underlying security. In this case, the option is said to be in the money, making it worth exercising. A put option's strike price is higher than the market price of the overall market value when it is in the money.
If the price of the underlying security is higher than the strike price, the put option loses all value and is no longer worth anything. The put option is seen as being out of the money when this happens. Just like an out-of-the-money call option, the holder of this kind of put option would fare better by selling it off before the expiration date.
What Happens When Options Expire? What Is an Options Expiry? - Hopefully, this article can help you to get some knowledge.
