As an options trader, it`s essential to understand what happens when your options contract expires. An option is the right to buy or sell a stock at a set price, and the expiration date is when that right expires. Let`s take a closer look at what happens when your options contract expires.
If You Don`t Exercise Your Option
If you have a call option, and the stock price is below the strike price, it`s not worth exercising your option. You`ll let the option expire worthless, and you won`t take any action. The same goes for a put option when the stock price is above the strike price; you won`t exercise your option, and it will expire worthless.
In this scenario, you`ll lose the premium you paid for the option. This loss is the maximum loss for the option trade.
If You Exercise Your Option
If you have a call option, and the stock price is above the strike price, you`ll exercise your option and buy the stock at the strike price. If you have a put option, and the stock price is below the strike price, you`ll exercise your option and sell the stock at the strike price.
When you exercise your option, there are two possible outcomes:
1. You Sell the Stock – If you exercise your option to sell the stock, you`ll receive the strike price per share. This amount will be deposited into your account.
2. You Buy the Stock – If you exercise your option to buy the stock, you`ll buy the stock at the strike price. You`ll need to have enough funds in your account to cover the cost of the shares.
What Happens Next
Once your options contract expires, you won`t have any more rights or obligations associated with the option. However, you may choose to buy or sell a new option on the same stock.
If You Don`t Have Enough Funds
If you don`t have enough funds to exercise your option, your broker may not allow you to exercise it. In this case, the option will expire worthless, and you`ll lose the premium you paid for the option.
Conclusion
In summary, when your options contract expires, you`ll either exercise your option or let it expire worthless. If you exercise your option, you`ll either sell the stock or buy the stock at the strike price. If you let your option expire worthless, you`ll lose the premium you paid for the option. As an options trader, it`s important to understand what happens when your options contract expires, so you can make informed decisions about your trades.
