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Options mechanics3 minute read
What happens when an option expires?
Understand why the last trading day, exercise style, automatic exercise, and broker rules all matter
Prepared by Mark · Primary sources below
Direct answer
Expiration is the point after which an option contract and its exercise right cease to exist. The outcome of a position held into expiration depends on the option's terms, whether it is in the money, exercise instructions, clearing rules, and the brokerage firm's handling. Expiration date and last trading day are related but are not always interchangeable labels
The contract has a finite life
Before expiration, an option can have intrinsic value, time value, or both. After expiration, an unexercised option has no remaining contractual right, which makes the date a central part of every strategy
Exercise and assignment are different sides of one process
An option holder may exercise according to the contract terms. Exercise can result in an assignment to a seller with an open short position, creating the associated obligation to buy or deliver the underlying
Near-the-money positions need a plan
Automatic exercise practices, cutoffs, account buying power, and after-hours price moves can affect an expiring position. The exact treatment varies by product and broker, so a guide cannot substitute for confirming account-specific rules
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