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"Are There Advantages For Options To Expire In The Money?"

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.

In both cases, commissions involved are the same for most online options brokers. Yes, most brokers charge the same commission for exercise (automatic or voluntary) or sale.

As such, it would be clear that the advantage of letting in the money options expire would be if you would want to continue being invested in the position directly by holding the stock position instead and the disadvantage being that you would actually lose the remaining extrinsic value on those options, if any. Another clear disadvantage of letting in the money call options expire worthless would be when you do not have enough money to pay for those stocks in the first place. In that case, your broker will automatically liquidate the position and credit the net profit to your account just like a cash settled option. In which case you would lose the remaining extrinsic value all the same for the same amount of intrinsic profit.

Lets look at a comparison of the net effect on account value in each case (since commissions are the same in both cases, it will be left out of the calculation):

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.

Scenario 2: Selling the Jan190Call

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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