Equity Option Expiration - Disclaimer
Options involve risks and are not suitable for everyone. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained by contacting your broker or The Options Industry Council at One North Wacker Drive, Chicago, IL 60606.
In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in these materials. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences.
Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results.
Presentation Outline
• Expiration- available months and expiration day vs. expiration Friday
• Long options at expiration- closing positions- exercise mechanics- “ex-by-ex”
• Short options at expiration- closing positions- assignment mechanics- assignment notification- pin risk
• Triple Witching Day
Expiration Months
• Available expiration months for equity options are standardized
• Any particular option class = 4 months- present calendar month + next- 2 farther-term cycle months- if LEAPS® available add January (if not included)
• Equity LEAPS®
- always expire in January- usually expire up to 30 months after initially listed
• Exceptions- WeeklysSM & Quarterlys
Expiration Day
• Equity options expire on the Saturday after the 3rd
Friday of their expiration months
XX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXXSatFriThuWedTueMonSun
June ExpirationDay
ExpirationDay
ExpirationDay
ExpirationDay
Expiration Friday
• Expiration Friday – 3rd Friday of month
XX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXXSatFriThuWedTueMonSun
June ExpirationDay
ExpirationFriday
Saturday vs. Friday
• Saturday – expiration day- option contracts literally expire- 11:59 P.M. (Eastern time)- day for OCC & members to confirm positions
• Expiration Friday- last day to trade expiring options- last day to exercise long contracts
• If 3rd Friday is exchange holiday- Thursday (before) last day to trade/exercise
Remember…
• Options expiring unexercised cease to exist- no rights for holders or obligations for writers
• As the call or put holder, you may either- sell (to close) position- exercise contracts- let contracts expire worthless
• As call or put writer, you may either- buy (to close) position- let contracts expire worthless (if not assigned)- fulfill obligations if or when assigned
Cost of Exercise or Assignment?
• In general: fees for exercise and assignment- vary among brokerage firms- may be equal to buy/sell commissions- know in advance – check with your broker
• If no existing stock position- after exercise/assignment a stock position results- keep position (at cash requirement)- liquidate (pay stock commission + market risk)
Long Options at Expiration: Closing Position
• Close position- sell before close of trading expiration Friday- close = 4:00 P.M (Eastern)- allow sufficient time for transaction(s)
• No longer have the right to buy/sell stock
• Realize cash profit or loss
• Majority of investors close vs. exercise
Long Options at ExpirationExercising Position
• Exercise long calls or puts- generally in-the-money contracts
• Remember: you have right vs. obligation- may exercise all long contracts- may exercise only part of the position- may exercise no contracts
• Your decision- consult with your broker/financial advisor beforehand
Long Options at Expiration:Exercising Position
• Exercise procedure- make your decision- give your brokerage firm exercise instructions- brokerage firm will instruct the exchange/OCC
• Timeframe for exercise at expiration- OCC has a cutoff time- a brokerage firm has a cutoff time (always before OCC’s)- a brokerage firm’s expiration cutoff time may differ from
its cutoff for an early exercise (before expiration)
Long Options at Expiration:Exercising Position
• Check with your brokerage firm!- know the procedures for exercise- know the timeframe for giving instructions- know when/how you will receive confirmation- the firm may allow canceling instructions (timeframe)
• Important!- once OCC has received your exercise instructions
they are irrevocable
Long Options at Expiration:Exercise by Exception
• Exercise by Exception (“Ex-by-Ex”):- OCC procedure for equity option exercise at expiration- long equity calls or equity puts- automatically exercised if in-the-money by $0.05 or
more- $0.05 is the “threshold”- index options $0.01 or more in-the-money are
automatically exercised and assigned
• A brokerage firm may have a different threshold from OCC’s
Long Options at Expiration: Exercise by Exception
• No obligation to automatic exercise
• You may instruct brokerage firm to- not exercise any/all options at/within threshold- exercise any/all options in-the-money by lower amount- exercise any/all options out-of-the-money
Note: “Ex-by-Ex” procedures are not intended todictate which customer positions should orshould not be exercised
Short Options at Expiration:Closing Position• Equity option writers are assigned based on position at end of last trading day
• Close position (to avoid assignment)- buy before close of trading expiration Friday- close = 4:00 P.M. (Eastern)- allow sufficient time for transaction(s)- buy to close
• No longer have an obligation to buy/sell stock
Short Options at Expiration: Assignment
• If you are assigned, you are obligated- to buy (put) or sell (call) underlying stock whether an
existing stock position or not
• Assignment procedure- OCC receives exercise instructions- assigns at random member with short position- “member” may be your brokerage firm- member assigns customer with short position at
random or by another disclosed method
Short Options at Expiration:Assignment Notice
• If you are assigned, you will be notified- usually before market opens next business day
(Monday)
• Know your brokerage firm’s method- may be via phone or email
• Access to your current account online?- expiration is Saturday- firm may post assignment online Sunday
Short Options at Expiration:Assignment Notice
• Out-of-town or out-of-touch?- assignment notice is irrevocable- notice not received – you are still assigned
• Your responsibilities- know the positions and anticipate assignment- check with the broker about assignment- be prepared for assignment (cash requirements)- understand risk after possible assignment
Short Options at Expiration:Anticipating Assignment
• Short option expiring in-the-money?- expect assignment
• Short option expiring at-the-money?- assignment not expected but possible- traders may exercise at-the-money to manage post
expiration positions
• Option trades below expiration price on Friday?- intra-day arbitrage might result in assignment- not necessary for option to “close” in-the-money to be
assigned
Short Options at Expiration: Pin Risk
• Short option expiring exactly at-the-money- expect assignment or not?- can’t predict 100% - there is always risk- this is “pin risk” – both call and put “pinned” to strike price
• If assignment is unacceptable- buy (close) position on expiration Friday- before close of trading – 4:00 P.M. (Eastern)- risk avoided
• If it seems possible – discuss with your broker
Triple Witching Day
• “Triple Witching Day”- index futures, index options and equity options expire- March, June, September and December
• So what?- professionals offset large futures/option/stock positions- expiration Friday – increased volatility possible- volatility may continue after 4:00 – before closing stock
price “hits the tape”- at 4:00 P.M. option may seem in- or out-of-the-money- at 4:01 P.M. may be the opposite