Hi guys, If a long option is ITM, what happens if I do not take any action on the last day of validity ? i.e. if I neither sell the option nor exercise it ? Does it get automatically result in an exercise or sale ? Or neither (resulting in a loss of the value of the option purchase price when it was bought) Thank you
Auto-exercised, sometimes brokers liquidate the option back in market if you don’t have sufficient capital to take delivery.
Thank you Amahrix. At what price does it get liquidatef to the market ? Also, if the long position was a covered position using the underlying - example long put and long underlying, I guess it would close the underlying position along with the long put option by doing an exercise correct ?
As far as the first part of your question goes.. it under the control of the risk management desk at your broker... up to them. For Tastyworks they email me on expiration day and warn me about my positions that are in the money. Robinhood did the same, they always liquidated my positions on expiration. Sometimes it was annoying.
I’d assume they’ll do what’s best for their books, not yours, meaning they’ll do what’s necessary to not take unnecessary risk on their end and if that comes at a cost to you, then unlucky for you.
Here’s the message I get from tastyworks every expiration. Hello, Our records indicate that you have expiring options in your account that may be exercised or assigned. Please keep in mind that if you do not have sufficient buying power to hold the underlying position(s) that would result from exercise and/or assignment, our risk team may close your position(s). If you are actively monitoring your position(s), can assure us that you will close any positions that may pose potential expiration risk, and do not want our risk team to transact in your account, please let us know by emailing tradedesk@tastyworks.com. We will do our best to accommodate these requests. Please keep in mind the following: We can not maintain "standing requests"; we need to be notified each expiration on expiration day. If you indicate that you are monitoring your positions, our risk team may still close positions on your behalf if deemed necessary. If you indicate that you are monitoring your positions and you do not close all positions that may pose potential expiration risk, we may not be able to accept these requests going forward. Short options can still be assigned if they close out of the money. This means that short options that close out of the money may still pose potential expiration risk. The only way to certainly eliminate expiration risk associated with short options is to close them.
Thank you Amahrix This means if we have the capital required to take assignment or exercise, then it won't be liquidated but rather assigned or exercised - is that right ? Or do they still liquidate it even if there is sufficient capital required ? I did not know that short options can be assigned even if they are OTM ! how close OTM do they have to be to be assigned ? One / two strikes or would they assign if it were even more than that ?
I have assigned people on options that expired OTM. It is rare anyone does that, so they need to be EXTREMELY close. Mathematically speaking, they should never be exercised OTM - why exercise a 20 strike to get short @20 if there is simultaneously a 20.10 bid which would obviously be the more advantageous price to get short at. The real hell is when options settles at the money. Then you go home having no idea what your position is.