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I'm a little unclear on what happens to in-the-money options on expiration. I know the option will get assigned, but does it also need to be bought/sold to close?

For example, say I sell a covered call, and it expires in the money. The underlying stock will be sold, but what about the option? It's now in-the-money, so it may be more expensive to buy back than the premium received for selling it, and maybe even the capital gain. The profit-loss diagram for covered calls shows a flat upside, which suggests the option is bought back for zero cost, but how can that be if it's in the money?

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    at expiry, the option 'expires', it is gone...so no need to buy it back. – Victor123 Apr 2 '15 at 19:07
  • @Victor123 So, the moneyness doesn't matter at expiration. The buy-to-close/sell-to-close is merely a formality to close out the position. – alekop Apr 2 '15 at 20:36
  • By 'at expiration', you mean expiration Friday? Or the Monday when the trade is actually settled. – Victor123 Apr 2 '15 at 22:37
  • I hadn't thought about the distinction, but I was thinking about the actual settlement, so Monday. – alekop Apr 3 '15 at 0:10
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    By Monday, the option is already gone from your account, so there is nothing to close. BTC and STC are only valid during the life of the option, not after it has expired! – Victor123 Apr 3 '15 at 1:06
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The option is exercised. The option is converted into shares. That is an optional condition in closing that contract, hence why they are called options.

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