The Options Expiration Issues about Automatic Exercise and After-Hours Risk

“What happens if I am long options, and they finish in-the-money?” … “Will I be assigned?” … and et cetera.  Hopefully, I can walk through some common expiration-afternoon questions here and shed some light on the process.

Automatic Exercise

First, the Options Clearing Corporation (OCC) automatically exercises options whose official close is one penny or more in-the-money.  Those holding long calls would buy 100 shares for each call they owned after the close on Friday afternoon.  Those with short calls might sell 100 shares for each call they were short as of the close.  The short does not control the exercise.

After-Hours Activity

what happens if the stock price moves after 4 p.m. Eastern Time on Friday?  As any of you who trade in the after-hours market know, stocks continue to trade after the bell.  Option strikes can move from out-of-the-money to in-the-money, or vice versa.

Trust me, the professionals in this market watch this very closely. They have approximately 1.5 hours after the close to make their decision on whether or not to exercise.  The most common examples of this behavior are with ETFs like the Spiders(NYSE:SPY) and the PowerShares QQQ Trust(NASDAQ:QQQQ).  These options even trade through 4:15 p.m. Eastern, but the options are settled based on the 4 p.m. close.  Because of this, you might be assigned on an option you are short when you don’t expect it.

Small moves in broad-based ETFs are risky, but probably controlled.  However, when there is an unexpected event right after the close on an expiration Friday, things can get really crazy.  Such as FDA ruling, occurs that moves a stock a huge percentage.  The stock might close at $51, but if a drug is approved, the stock could be trading at $73 after the close.

In this instance, one could expect to get short calls assigned even at the $55, $60, $65, and $70 strikes.  All of them might not be assigned, because if the person long the calls did not realize what happened, he may not call in to exercise them.  Again, this is very rare, but it has happened.  For those who tend to be sellers of options, please remember: YOU DO NOT CONTROL WHETHER OR NOT YOU GET ASSIGNED … EVER.   If something happens, you are at the whim of the people long the options.

How can you avoid some of these corner cases?  You could close your positions before 4 p.m. Eastern.  If you do this, there is no exercise or assignment risk.  However, if you are short, you might be paying commissions and a small fee to buy back the options you feel will be worthless in almost every situation.

I think you should assess these case by case.  Is there risk in being short calls in the SPY that are 10% out-of-the-money?  Or is there risk in being short puts in the AAPL that are 20% out-of-the-money? Yes, but for heavyweights and large caps, the odds of this happen in the 1.5 hours after the close are very remote.  It is probably a risk you can live with.

$Apple(AAPL)$ $Invesco QQQ Trust(QQQ)$ $SPDR S&P 500 ETF Trust(SPY)$

# Options Hub

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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  • LawrenceSG
    ·2022-04-15
    What button to press to exercise?
    Example I buy put, to exercise it...
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    • LawrenceSGReplying toOptionsTutor
      Thanks for the enlightenment
      2022-04-15
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    • OptionsTutor
      There is no exercise button. All options that are "in-the-money" will be automatically exercised at expiration. Before expiration, if you don't want to hold on, “close position” is a common operation.
      2022-04-15
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  • LiverpoolRed
    ·2022-04-15
    I never get to exercise after the market closed with post price at $3.01. I sell call option at $3. The closed market price is $2.95.
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  • Innovator
    ·2022-04-21
    Hi so if I sell Put, and the buyer exercise, and my cash account don't have enough cash, do tiger trigger me to top up and given t+1 days to fund my account? What actually will happen?
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  • bwjx
    ·2022-04-16
    Thanks. I always try to close my options before expiration. Bio tech is one stock that I will not touch for options trading. E.g. $Veru Inc.(VERU)$
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  • balexhu
    ·2022-04-15
    And if you were the seller of the option and it expires in the money, is it reasonable to assume that you will be assigned? And when would this transaction occur and shown in the app?
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  • balexhu
    ·2022-04-15
    If you were the seller of the option, and they are many buyers of the same option whom might let it expire or chose to close it. How does the system know which buyer pairs up with you?
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  • Prost
    ·2022-04-16
    option trading needs to observe closely from time to time
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  • Jeezz
    ·2022-04-16
    thanks for sharing
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  • Joashtys
    ·2022-04-20
    Thanks for sharing
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  • AJliew
    ·2022-04-20
    Great ariticle, would you like to share it?
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  • ninjapoh
    ·2022-04-20
    tuyyuuuu
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  • xholox
    ·2022-04-19
    options call call
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  • Blessed Moo
    ·2022-04-19
    Good information. Thanks
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  • wine18
    ·2022-04-17
    [smile] like pls
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  • Vincenttan91
    ·2022-04-16
    Love this options
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  • jannn
    ·2022-04-16

    G[smile] 

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  • JunioR
    ·2022-04-16
    Gambling with extra steps.
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  • Auroknight
    ·2022-04-15

    sweee sweee

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  • GerryLoh
    ·2022-04-15
    good sharing thanks
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  • Dee Kit
    ·2022-04-20
    Thanks
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