← BeginnerLesson 13 · 4:53
What happens on expiry day, and should you sell or exercise?
Summary
You can name your three paths on expiry day: sell the option, exercise it, or let it expire. You can work out the cash exercising takes and show why selling usually keeps the time value that exercising throws away. You know an option in the money by a cent is generally exercised automatically unless you tell your broker otherwise.
Key terms
- exercise
- Using the right in an option, so a call buys, or a put sells, the shares at the strike price.
- automatic exercise
- Options in the money by at least one cent at expiry are generally exercised for you, unless you tell your broker otherwise.
- American-style
- An option you can exercise on any day up to expiry, as with options on individual U.S. stocks.
- European-style
- Another style of option with different rules on when it can be exercised.
- let it expire
Check yourself
Answer each question to see why the right answer is right.
1. You hold one call with a strike of $100, bought for $345. How much cash does it take to exercise it?
2. With 14 days left and XYZ at $105, you can exercise or sell your $345 call. How do the two compare?
3. Why does exercising before the last day throw money away?
4. On the last day XYZ closes at $100.01 and you do nothing with your $345 call. What generally happens?
5. Can you exercise an option on an individual U.S. stock before the last day?
Finished the video and the quiz? .