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"What If Long Calls Expire ITM?"

Question By Michael Scott "What happens if I do nothing and my long call expires in the money (ITM)?" Asked on 3 June 2017

Answered by Mr. OppiE

Hi Michael Scott,

First of all, if you do not intend to exercise your long call options and is only using it for leveraged directional speculation, you should never be holding a long call option through expiration. Simply Sell To Close in order to take profit or roll it forward to the following month if you intend to continue speculating in that direction, ahead of expiration. I usually do it a couple of days ahead of expiration because as expiration draws nearer, all in the money options are subject to random early assignment even before expiration, this is something you need to take note of too.

If you hold your in the money long call options through expiration by accident, it will be automatically exercised so that you end up with shares of the underlying stock bought at the strike price of the long call options since the long call options allow you to buy the underlying stock at the strike price. However, it is not necessarily a bad thing as your account value would not be affected. Here's an example:

What If Long Call Expire In The Money? Assuming you are holding 1 contract of QQQ January $130 Call Options bought for $1.00 when QQQ was trading at $130. At that time, you have $14000 in your account so your account value was $14000 (less commissions) at the time of purchase, with $100 value in call options and $13900 in cash. Assuming by January expiration QQQ rose to $150. The value of your January $130 call options rises to $150 - $130 = $20 x 100 = $2000, making your overall account value $2000 + 13900 = $15900. You failed to sell the long call options and they expire and get automatically exercised. The call options disappear with whatever value it holds. In exchange, you end up owning 100 shares of QQQ bought at $130 (the strike price of the call options) for $13000. So now, you have in your account 100 shares of QQQ + $900 cash. Account value is $15000 (because the QQQ shares are trading at $150 now even though you bought them at $130) + $900 = $15900. Which is exactly the same as when you were still holding the call options, see?

In this case, you could actually continue to hold the QQQ shares for longer term bullish speculation if you continue to be bullish on QQQ or if you wish, you could even sell the QQQ shares and then buy more call options if you like. It is more of a hassle but should not negatively impact your account value significantly.

However, what if you never had the cash in order to buy the underlying stocks at all? In this case, most brokers would automatically sell the shares the moment the options are exercised and post to your account the difference less commissions. Sometimes some slippage due to time taken for the whole process can occur resulting in slightly lower or even higher profit.

What If Long Call Expire In The Money? Assuming you are holding 1 contract of QQQ January $130 Call Options bought for $1.00 when QQQ was trading at $130. At that time, you have no extra cash in your account so your account value was $100 at the time of purchase. Assuming by January expiration QQQ rose to $150. The value of your January $130 call options rises to $150 - $130 = $20 x 100 = $2000. You failed to sell the long call options and they expire and get automatically exercised. The call options disappear with whatever value it holds. In exchange, you end up owning 100 shares of QQQ bought at $130 (the strike price of the call options) for $13000 but since you don't have the cash to own the shares, the broker immediately sells the shares at $150 (the current market price), posting to your account the difference of $2000, which is exactly the same as the profit you made with the call options.

However, what if you bought in the money call options and by expiration, the price of the stock is slightly lower than when you bought it for but still in the money? In this case, the long call options would still be exercised with an overall loss posted on your account value.

What If Long Call Expire In The Money? Assuming you are holding 1 contract of QQQ January $130 Call Options bought for $21.00 when QQQ was trading at $150. At that time, you have $16000 in your account so your account value was $16000 (less commissions) at the time of purchase, with $2100 value in call options and $12900 in cash. Assuming by January expiration QQQ falls to $140. The value of your January $130 call options drops to $140 - $130 = $10 x 100 = $1000, making your overall account value $1000 + 13900 = $14900, making a $1100 unrealised loss. You failed to sell the long call options and they expire and get automatically exercised. The call options disappear with whatever value it holds. In exchange, you end up owning 100 shares of QQQ bought at $130 (the strike price of the call options) for $13000. So now, you have in your account 100 shares of QQQ + $900 cash. Account value is $14000 (because the QQQ shares are trading at $140 now even though you bought them at $130) + $900 = $14900. Which is exactly the same as when you were still holding the call options, see?

Similarly, if you don't have the cash to buy the underlying share when exercised, the broker would usually sell the shares immediately and post the loss on your account.

What If Long Call Expire In The Money? Assuming you are holding 1 contract of QQQ January $130 Call Options bought for $21.00 when QQQ was trading at $150. At that time, you have no cash in your account so your account value was $2100 (less commissions) at the time of purchase. Assuming by January expiration QQQ falls to $140. The value of your January $130 call options drops to $140 - $130 = $10 x 100 = $1000, making a $1100 unrealised loss. You failed to sell the long call options and they expire and get automatically exercised. The call options disappear with whatever value it holds. The broker buys the QQQ shares at $130 (strike price of the long call options) and immediately sells them at $140 (the current market price) and post the difference of $14000 - $13000 = $1000 to your account. Since you bought the call options for $2100 and you only have $1000 now, you made a $1100 loss, which is the same as if you sold the long call options just before expiration when QQQ was selling at $140.

In conclusion, its not a bad thing to happen if your long call options get automatically exericsed through expiration as it should not significantly affect your account value. However, take note that commissions would be further incurred if you sold those shares and then buy more call options. As such you are actually spending more in commission than if you would simply selling those call options and rolling them forward to the further month call options that you want. All in all, I never allow in the money call options that I own to expire in the money. I always close them or roll them forward on the day before expiration.

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