If you trade options, you know that expiration day can be a wild ride. Some trades go exactly as planned, while others take an unexpected turn—like waking up to an assignment you weren’t expecting.
This week, regular February Monthly options expire. I'm often asked about what happens to my positions or portfolio if I'm holding something that is expiring.
So, what actually happens when your options expire? Whether you’re holding long calls, short puts, or an iron condor, understanding assignment, settlement, and pin risk can save you from some unpleasant surprises. Let’s break it down.
What Happens When an Option Expires
When options hit expiration, a few things can happen:
• If they’re out of the money (OTM) → They expire worthless. No harm, no foul.
• If they’re in the money (ITM) → They’re usually exercised or assigned.
• If they’re right at the strike price → Things can get interesting (we’ll talk about pin risk in a bit).
Most brokers will automatically exercise an option if it’s at least $0.01 in the money (mine do!), but it’s always good to double-check your broker’s rules.
Assignment: What If You Sold an Option?
If you’ve ever sold an option, you run the risk of being assigned—meaning someone on the other side of the trade is making you fulfill your end of the contract.
• Sold a call? You might have to sell shares at the strike price (even if the stock is way higher).
• Sold a put? You might have to buy shares at the strike price (even if the stock has dropped like a rock).
Most of the time, assignment happens automatically at expiration if the option is ITM. But here’s a twist: traders can exercise options early, especially if there’s a dividend involved. So, don’t assume you’re in the clear just because expiration isn’t here yet.
Watch Out for Margin Calls on Assignment
Getting assigned a stock position can be an unpleasant surprise if you don’t have enough buying power to hold it.
• If you’re assigned a short put, you’re now long the stock—meaning your broker just bought shares for you at the strike price.
• If you’re assigned a short call, you’re now short the stock—meaning you owe those shares to the market.
If your account doesn’t have enough funds to support the new position, your broker will issue a margin call. But don’t panic! There’s an easy fix:
👉 Just close the position at the open of the next trading day, and your margin call will be satisfied.
Brokers typically give you a short grace period to take action, but if you don’t, they’ll close the position for you—often at a less-than-ideal price. So, if you wake up to an assigned position you didn’t plan for, just exit quickly and move on.
Settlement: Cash vs. Stock
Not all options settle the same way. It depends on whether they’re tied to a stock or an index.
• Stock options are physically settled, meaning shares actually change hands if the option is exercised.
• Index options (like SPX) are cash settled, meaning instead of getting shares, your account is adjusted for the price difference.
One sneaky thing about index options? They don’t always settle based on the closing price. Some use the next morning’s opening price, which can lead to unexpected results. Always check the contract details!
Pin Risk: The Expiration-Day Guessing Game
Ever noticed how stocks sometimes hover near a big options strike price on expiration day? That’s pin risk in action.
Why should you care?
• If your option expires right at the strike price, you won’t know for sure if it gets exercised or not.
• Big market players (like hedge funds and market makers) might push the stock around near key strikes.
• If you’re holding short options, you might not know if you’ll end up with a stock position until after the market closes.
Pin risk can be a real headache, especially if you don’t want to wake up Monday morning with an unexpected stock position. One way to avoid it? Close your trade before expiration.
How to Handle Expiration Like a Pro
1. Keep an eye on your positions—especially if they’re close to the money.
2. Know your broker’s exercise rules—don’t assume all brokers work the same way.
3. Close positions early if needed—sometimes, it’s better to lock in profits (or take a small loss) rather than risk the unknown.
4. Be mindful of market volatility—expiration can get crazy, especially for heavily traded stocks.
5. Check your account the next morning—if you were assigned a position you don’t want, just close it at the open to avoid any margin issues.
Final Thoughts
Expiration day doesn’t have to be stressful—if you know what to expect. Whether you’re trading for income, hedging, or just learning the ropes, understanding assignment, settlement, and pin risk will help you stay ahead of the game.
Have you ever had an unexpected assignment or expiration-day surprise? Shoot me an email: sean@allstarcharts.com
