What happens when options expire?

10th Nov 2009 by JonB

Options always expire at the end of the 3rd Friday of expiration month. The vast majority of options expire worthless. Since options give you the right, but not the obligation to exercise, if the holder will lose money by exercising obviously they are simply going to let the options expire. This is what happens the vast majority of the time. However keep in mind that you don't have to exercise an option to make money off it it. If you own call options on a stock and the stock price rises dramatically you may simply sell your option contract to someone else for more than you paid for it. Even if the stock gets nowhere near the strike price, the fact that it moved closer may be enough to cause the options price to jump. Sometimes this jump is dramatic. I've seen options rise 9,000% in one day. Keep in mind though that just because the stock may be moving your direction, your option may not increase in value because of time decay (also called theta). Every day expiration moves closer, if you're strike hasn't been reached, the price of the option will suffer.

This answer is the subjective opinion of the writer and not of FinancialAdvisory.com