Question By Mark V.
Is there any advantages for options to expire ITM?Asked on 17 January 2010 (updated in Oct 2021) |
Answered by Mr. OppiE
Hi Mark,
When an option is in the money during expiration, it will be automatically exercised as regulated by the Options Clearing Corporation or OCC. So, your question is, is there any advantages to allowing options to expire when they are in the money?
In order to answer this question, lets explore what exactly happens when an option becomes automatically exercised. When an option is exercised, the option cease to exist along with any extrinsic value (of course there won't be any extrinsic value left by the time an option is automatically exercised upon expiration) and then you get the equivalent number of shares in the stock in your account (for call options) or short the equivalent number of shares of the stock (for put options).
If you do not allow an in the money option to expire but sell it on or the day before expiration, you will make whatever profit you have made so far and would have recovered whatever extrinsic value is left in the option.
Are There Advantages For Options to Expire In The Money?Assuming you are holding 1 contract of AAPL's January $190 call options when AAPL was trading at $190. AAPL is currently trading at $205 on January options expiration day and the Jan190Call are priced at Bid $15.10 and Ask $15.50 when market opens on expiration Friday. You have $19,000 in cash remaining in your account. Your net account value is $19,000 + $1510 = $20,510. Scenario 1: Letting Those Options Expire In The Money You let the Jan190Call expire and bought 100 shares of AAPL at $190 with all of your remaining $19,000 in cash. Since AAPL is trading at $205, your account value is now $20,500. Yes, a reduction of $10 due to letting the remaining extrinsic value in the Jan50Call disappear. You sold the Jan190Call when market opens on expiration Friday for its bid price of $15.10 and got $1510 in cash. Your account value remains at $20,510. |
In conclusion, the only advantage to letting options expire in the money is when you intend to hold the stock position for longer term investment. In fact, the disadvantages are plenty in terms of commissions and remaining extrinsic value. However, take note of your account value and available margin. If they are insufficient, you may not take delivery of the stock position even if they are automatically exercised.
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