What Happens When Options Expire in the Money? [Buyer and Seller Cases]

What happens when options expire in the money? And does it change depending on whether you’re a buyer or a seller? In this article, we look at what happens when options expire in the money for both buyers and sellers and how it can impact their positions.

Key takeaways

• When an option expires in the money, it will be automatically converted into the underlying asset or cash for settlement. ITM options are exercised automatically by the Options Clearing Corporation (OCC), ensuring a standard process for all market participants.
• The implications vary for buyers and sellers: buyers either receive stock (call) or settle cash (put), while sellers are subjected to assignment.
• If you are a buyer and do not wish to exercise your ITM option at expiration, you will need to inform your broker or sell prior to the end of the option life.

What Happens When Options Expire in the Money? The Case for Options Buyers

When an option expires in the money, it is automatically exercised, either resulting in the transfer of the underlying asset or a cash settlement. This process is standardized by the Options Clearing Corporation (OCC), creating a consistent approach for all parties involved. 

The “in the money” (ITM) status happens when the option’s strike price is favorable compared to the market price, offering intrinsic value. 

If you do not wish to have your ITM options exercised at expiration, you will need to inform your broker. The automatic execution is sometimes referred to as “exercise by exception,” and you will find that it is generally what happens in the real market (from the brokers’ point of view, this system is much easier to handle compared to asking every client what they plan to do with their options).

For sellers, this means dealing with assignment, which could lead to either delivering shares or buying them at the strike price, depending on the option type. But for now, let’s stick to buyers. Here’s a table summarizing what happens when options expire in the money assuming you bought these contracts:

What Happens When Call Options Expire in the Money?

If you purchase a call option (perhaps using our options screener) that expires ITM, you have the right to buy the underlying stock at the strike price. Since the option is automatically exercised, you can acquire the agreed number of shares at the strike price, which can be advantageous if the strike price is lower than the current market price.

Here’s how it works in a typical scenario: 

• You get the stock at a discount: For example, if the strike price is $50 and the market price is $55, you exercise the call option. You pay $50 per share, securing a $5 per share discount compared to the current market value. 
• Adding value to your portfolio: By obtaining shares at a lower price, you stand to benefit from immediate equity value if you decide to hold or sell at the market price. 

It’s important to monitor your options closely and have a strategy in place to maximize gains from exercising ITM options.

What Happens When Put Options Expire in the Money?

For puts, a buyer exercises the right to sell their stock at the strike price. If you sold the put option, you must buy the shares at the strike price, even if the market value is lower. This scenario can lead to significant losses if the market price has dropped far below the strike price.

Here’s an example to clarify:

• The buyer locks in a higher price: If the strike price is $50 but the market price drops to $45, the buyer exercises their put option. They sell the stock to you for $50 per share, leaving you with a $5 per share loss compared to the current market value.
• Your risk as the seller: Accepting shares at a loss might tie up your capital or require you to wait for the stock’s value to recover.

We will spend more words on the seller case in the next section, as this is certainly worth discussing in more detail.

What Happens When an Option You Sold Expires in the Money?

And now, let’s look at the seller side. When you sell an option and it expires in the money, the outcome is almost always assignment. This is because the Options Clearing Corporation (OCC) automatically exercises options that are ITM, even by as little as $0.01. Sellers must be prepared to handle the obligations that come with this process.

Now, before we look into the details of this case, here’s a table that sums up what happens when options expire in the money, assuming you shorted them:

Automatic Exercise by the OCC

If an option expires ITM, the OCC mandates its exercise as part of their standardization rules. This means the buyer of that option will execute their right, either purchasing or selling the stock at the strike price, depending on whether it’s a call or put. For you, the seller, this results in assignment.

Here’s what this looks like:

• Call option sold ITM: You’ll need to sell the underlying shares at the strike price, regardless of their current market value.
• Put option sold ITM: You’ll be required to buy the underlying shares at the strike price, even if their market value is much lower.

The OCC ensures this process is systematic, so there’s no guesswork involved.

Role of Brokerages in Assignment

Your brokerage plays a key role in the assignment process. After the OCC determines which options are exercised, these assignments are parceled out to brokerages based on the proportion of open ITM positions their clients hold. From there, the brokerage assigns specific contracts to individual traders.

For sellers, this means:

• Pro-rata distribution: If you’ve sold multiple contracts that expire ITM, you’ll be assigned based on the OCC and brokerage calculations.
• Alignment with open positions: Assignments are limited to traders whose positions match the exercised contracts.

This system ensures fairness among market participants. However, it also underscores the importance of managing your positions carefully, particularly as expiration approaches.

Rare Occurrences and Exceptions

While assignment is standard when options expire ITM, there are rare exceptions. For instance:

• Last-minute price changes: If the stock price moves out of the money just before expiration, some buyers might choose not to exercise their rights, leaving the seller unassigned.
• Unexercised options redistribution: Sometimes, unexercised ITM options are randomly reassigned among brokerages. Although this is uncommon, it can still happen as part of the options settlement process.

By understanding what happens when options expire in the money, sellers can prepare for their obligations and minimize potential losses.

What Happens When Options Expire Out-of-The-Money?

Finally, it’ll probably be easier to understand the importance of the question “what happens when options expire in the money” by looking at the other side—what happens when options expire out of the money (OTM).

Are you an option buyer? Do you prefer selling? Do you generally mix the two strategies? Here are a little more details on the matter (for both sides of the trade).

Buyer Implications

For buyers of OTM options, expiration means forfeiting the total amount spent on the contract. Since no intrinsic value exists, the option cannot be exercised for a profit. Take this scenario as an example:

• Suppose you purchase a call option for $100 with a $60 strike price. If the stock price ends at $58 at expiration, the call is OTM, and the $100 premium is lost because exercising the option would result in no profit.

This is why timing, analysis, and strategy are crucial when buying options, especially OTM contracts.

Seller Implications

On the flip side, sellers benefit when OTM options expire. Sellers of OTM options retain the premium paid by the buyer, making it a profitable situation if the contract ends out of the money. For instance:

• Selling a call option with a $40 strike price while the stock stays under $40 means no exercise by the buyer, and you, the seller, keep the premium entirely.

This income opportunity can make selling OTM options an appealing strategy for traders.