Closing worthless options how?

mutluit · May 3, 2013

Hi,
sorry, this is maybe a FAQ but couldn't find reliable info:
Question:
how are worthless options (long put) handled when they expire?
Does one need to close the position or is it done automatically?
Is there a danger with such worthless options, ie. assignment/excersise etc. possible?

FrankSlaughtery · May 3, 2013

Quote from mutluit:

Hi,
sorry, this is maybe a FAQ but couldn't find reliable info:
Question:
how are worthless options (long put) handled when they expire?
Does one need to close the position or is it done automatically?
Is there a danger with such worthless options, ie. assignment/excersise etc. possible?

you don't need to do anything.

there is no risk unless they are close to ATM. for ex, say you're long a front month spy 100 put w/ the spy at 100.01 at 3:59:59 EST. you figure you don't need to do anything. the next second it falls to ITM and the option is automatically exercised. You are now short 100 shares. assume there's a maco event or some deal over the weekend that causes a gap up and you've got a prob. to be on the safe side either close on expiry day nlt 3 pm or call your broker and give them a "do not execute" order for each position.

mutluit · May 3, 2013

Quote from FrankSlaughtery:

you don't need to do anything.

there is no risk unless they are close to ATM. for ex, say you're long a front month spy 100 put w/ the spy at 100.01 at 3:59:59 EST. you figure you don't need to do anything. the next second it falls to ITM and the option is automatically exercised. You are now short 100 shares. assume there's a maco event or some deal over the weekend that causes a gap up and you've got a prob. to be on the safe side either close on expiry day nlt 3 pm or call your broker and give them a "do not execute" order for each position.

Thx for the info.
Here's an interesting lawsuit regarding these cases:
"Jinming Cao v. Interactive Brokers, LLC - Commodity Futures ..."
http://www.cftc.gov/LawRegulation/Dispositions/idcao072809

Another info I found on the net:

Q: When do option contracts expire?
A: All equity options and index options expire at 11:59 PM ET on the Saturday following the third Friday of the expiration month. An expiring option will stop trading at 4:00 PM ET on the business day before the expiration day.

Q: Is there a commission or other charge for an option that expires worthless?
A: There is no commission charge for an option that expires worthless. However, if you exercise an option contract which is long or are assigned on a contract on which you are short, the resulting event is a transaction that will entail a corresponding commission charge.