[Options] What Happens to Long Options Positions on Expiration Day ?

Sean McLaughlin
April 10, 2022

What Happens on Expiration Day when I'm holding long options?

I’ve gotten some questions recently about what happens to an open options position if we’re still in it when the contracts expire. 

Caveat: I will rarely hold an options contract in ASO trades into expiration unless it’s a winning position and it's going my way. Profit targets or stop loss exits will usually get me out far in advance of expiration day.

Let’s dig in… 

Imagine a scenario: Regardless of how long we’ve been in a position, here we are and the market is about to close on expiration day. What should I do? Do I even need to do anything?

Well, that depends on where the underlying security is in relation to our strike prices. 

There are three situations we’ll potentially find ourselves in – all our options are out-of-money (OTM), all our options are in-the-money (ITM), or the underlying is trading somewhere in the middle of our existing strikes on a spread.

All strikes are out-of-the-money (OTM): Whether I’m in a single-leg trade (long calls, for example), or a multi-legged spread (Vertical spread, for example), this one is pretty straightforward. All of the options will expire worthless and there’s nothing to be done. If I earned a credit when I originally put the trade on, I’ll keep that entire credit. If I paid a debit, then I lost everything (no big deal as long as I sized my position appropriately).

All strikes are in-the-money (ITM): 

  1. If I’m holding a simple long calls position, then I’ll be assigned 100 shares of stock times the number of contracts I hold, and my cost basis on this long stock position will be whatever the strike price was. So, if I held five $75-strike calls, then I would then become the proud owner of $500 shares of stock at a cost of $75 per share. Similarly, if I’m long puts, then I’d become the owner of a short stock position at the strike price. Important to note: if I don’t have enough buying power in my account to hold this stock position (stocks are more expensive to hold), then I’ll be issued a margin call by my broker. In this situation, I’ve got two options: wire more money into my account to satisfy the call (I don’t recommend this), or simply close enough (or all) of the stock to satisfy the call. For me, I’ll just close the stock position. Easy.
  2. If I’m holding a spread (like a bull call spread) and both options are ITM, then I’ll be “assigned” on both. But what that really means is my account will be credited whatever the difference is between the strikes (times the number of contracts I held). For example, if I’m long a one-lot 30/40 bull call spread, I’ll receive a credit of $1000 ($10 width between strikes x100 shares) less any assignment fees my brokerage charges. It would be the inverse of this if this was a short credit spread – I’d be debited the difference between the strikes.

I’m holding a spread and the underlying is closing in between my strikes: This is probably the trickiest scenario, and one I try to avoid. If my position expires with one or two legs of a multi-legged spread in the money, then I’ll be assigned on just those strikes. Then it becomes a situation like in (1) above with the ITM options. But I might find myself with a position that does not align at all with my original trade thesis. So I avoid this whenever I can.

Hope this clears things up.

If not, let me know and hit me with any follow-up questions.

~ @chicagosean

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