Option Expiration: Expiration Day typically occurs Friday, or Thursday if that is the last trading day of the week. However, certain securities may also have Monday, Wednesday, or Quarterly expiration days.
Automatic Exercise on Expiration Day:If you hold an expiring long option through expiration day that is a $0.01 or more in-the-money, the OCC (Options Clearing Corporation) will automatically exercise this option. The OCC will use the official closing price to make this determination. In-the-money would be $0.01 higher than the strike price for call options and $0.01 or lower for put options. The automatic exercise will result in your account purchasing or selling the deliverable of the option at the strike price. If you do not want your option to be automatically exercised, then you may submit a Do- Not-Exercise instruction via the app or speaking with a broker. You have up until 4:00 PM or market close to submit a Do-Not-Exercise instruction. *Please Note: Deliverables are subject to change.
Out-of-the-Money Exercise or At-the-money Exercise on Expiration Day:An option that is out-of-the money or at-the-money will not be automatically exercised by the OCC (remember $0.01 threshold). However, you may still exercise these options, but you must instruct us to do so. You can submit the exercise instruction in the app or speaking with a broker by 4:00 PM on expiration day or market close on market half days.
Short Options, Assignment & Delivery: Assignment - The owner of a long option has exercised their right against an option writer. For equity and index options, OCC makes assignments on a random basis.
Delivery: The process of meeting the terms of a written option contract when notification of assignment has been received. In the case of a short equity call, the writer must deliver stock and in return receives cash for the stock sold. In the case of a short equity put, the writer pays cash and in return receives the stock. *Please Note: Deliverables are subject to change.
Out-of-The-Money Short Options: Your short option may be assigned even if it is out-of-the-money or at-the-money. There are certain cases where it may be economical for an out-of-the-money option to be assigned, for example: extended hour market activity or to claim a dividend. Please know that even if your option is out-of-the-money it is by no means an assurance that you will NOT be assigned.
In-the-money Short Options at Expiration:In-the-money short options are also at risk of not being assigned. The long option holder may choose not to exercise the option by submitting a ‘Do-Not-Exercise’ instruction. There also may be extended session market activity which no longer make the exercise economical. Please know that just because your short option is in-the-money it is by no means an assurance that you WILL be assigned.
Expiration & Account Equity:It is your responsibility to review your expiring option positions and ensure your account has sufficient equity to support an exercise/assignment. Please be sure to read the risks and maintain sufficient equity to support a short option assignment. Please know that even if your option is out-of-the-money it is by no means an assurance that you will NOT be assigned. Please familiarize yourself with the deliverable of the option and the responsibility you incur from the assignment/exercise process. The resulting position may result in margin charges, hard-to-borrow charges and is subject to market risk.
Aries Auto-Liquidation & Expiration Risk: Aries may take action in your account. Aries does not offer the opening of same day expiring options at 1 hour prior to market close. Two hours prior to market close Aries will cancel any opening orders for a same day expiring option. Please understand that we expect every customer to close any out of the money, in the money, or at the money option position at least 35 minutes prior to market close that may pose a risk to your account or to Aries. If you fail to do so you may be subject to be either an auto-liquidation, a do-not-exercise, an exercise, or an assignment, depending on if there’s sufficient equity in the account to support the underlying position or not. Aries is under no obligation to take this action and it is expected that each customer manages their positions through expiration and understand the potential risks and characteristics of options.
Ram Financial, LLC reserves the right to close out options that pose a risk if exercised or assigned.
Spreads & Expiration Risks: Spreads may be known as a ‘defined-risk’ trade, but this refers to the maximum theoretical max loss or gain of the trade at time of entry. Keyword in the sentence is “theoretical”. Spreads at expiration pose a particular risk to your account. Spread Expiration Risk is when there is a creation of an unhedged underlying position in your account from an exercise/assignment. Essentially, if you hold the strategy through expiration, it may lead to a different risk profile and margin requirement. What can happen is as follows:
- The trader establishes a 10-lot short vertical call spread on XYZ that is $10.00 wide:
o Sell 10 XYZ Jun 16 $100 Call
o Buy 10 XYZ Jun 16 $110 Call
§ The margin requirement for the above trade is $10,000.00 – 1000 shares / $10 wide.
o There are two scenarios that can happen.
§ 1) XYZ closes expiration day at $105.00 pinning between the strikes. The $100 call will be in-the-money and the $110 call will expire out-of-the money. Your defined risk trade of $10,000.00 has now changed to you assuming a potentially a $100,000.00 assignment through expiration. This is known as ‘pin-risk’ as the underlying pins between the strikes and should be managed appropriately going into expiration.
§ 2) XYZ closes expiration day at $99.00 – Both legs are out-of-the-money, and the trader takes no action. XYZ in the extended session has a large price movement and climbs to $103.00.
§ In the above situation, the short $100 call is likely to be assigned but we do not know for sure, and we do not know exactly how many of the 10 contracts will be assigned.
§ Let us fast forward. On Monday the trader is assigned on 8 of the 10 contracts (random allocation) which results in the account taking delivery on 800 shares of XYZ at $100.00. XYZ continues to rally to $115.00 before the short is closed. The trader has now lost $12,000, $2,000 greater than the theoretical max loss of the strategy. XYZ happened to be a hard-to-borrow security, and the trader was subsequently charged hard-to-borrow fees for holding the short position over the weekend.
o If the inverse were to happen and the long option closed in-the-money, please instruct us to submit a Do-Not-Exercise on your behalf by 4:00PM or market close on expiration day.
You are responsible to understand these risks and managing all risks associated with spreads.
After Expiration: In the event the exercise/assignment results in a Reg T or a Money Due Call – you can avoid restrictions/penalties if you cover the call on T+1 of expiration date.
Early Exercise of Options: If you would like to submit an early exercise request you can do so from the app or by speaking to a broker. Currently, the exercise in-app feature is only for single-leg options. If you would like to submit exercise instructions for an option that is part of a complex strategy you will need to submit verbal or written instructions via in-app feedback. You need to submit the request by 4:30 PM or 30 minutes after market close on market half days. Any requests submitted after 4:30 PM EST will be reviewed on a best-efforts basis. On expiration day you have up until 4:00 PM or market close to submit exercise instruction. If we are unable to process your request, you will receive an exercise cancellation from us and you are free to submit an instruction the next trading day. If you submit your requests after 5:30PM EST or 1.5 hour after market close it will be rejected and you will need to resubmit the instruction next trading day. Once you submit an exercise instruction your option will be frozen until we have submitted the instruction to the OCC. You must maintain sufficient equity or corresponding underlying shares to support the early exercise of a call or a put option contract. Sufficient buying power or corresponding underlying shares must be held throughout the day until the end of trading at 8 pm. For example, if you are exercising 1 ZYX $1 Call option you will need to maintain $100 in buying power in the account until 8 pm on the day the exercise request is submitted. The exercise request is processed overnight, and your position and balances will be updated on the next business day. We are working to make this a real-time process and appreciate your patience!
To reiterate the points – Prior to expiration day you may submit an early exercise request until 4:30PM or 30 minutes after market close. On expiration – you must submit all instructions by 4:00 PM or market close.
Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the value of their investment in a short period of time and incur permanent loss by expiration date. Additionally, investors can lose more than their initial investment. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options and Option Spread Risk Disclosure before trading options.
Margin Trading may not be right for everyone. It is important to understand the rules and conditions margin trading or borrowing may have on your investments.