Put options give you the right but not the obligation to sell the underlying shares at the strike price on or before expiration. A put option is considered in the money if the strike price is higher than the current stock price. Therefore, a 25 put on a stock priced at $24.50 is 50 cents in the money.
So what happens to in-the-money puts at expiration?
If you own a put that is in the money at expiration, it will be automatically exercised. That is, the terms of the put contract are enforced such that you must sell the underlying shares for the strike price. If you don’t have the shares in your account (and most people don’t), your broker will buy them on your behalf and then sell them. This can get a bit messy, especially if you don’t have the funds to cover the share purchase.
The end result, however, is essentially the same.
Let’s say you own five ABC 25 puts at expiration. The stock closes at $24.50 on expiration Friday. Because your put is in the money, it is automatically exercised. If you don’t own ABC. Your broker will buy 500 shares in the open market, then turn around and sell them to the put seller for $25 apiece. The $250 gain on the stock buy and sale is the same as selling your puts for 50 cents (the amount they were in the money).
Your broker should warn you (usually a few times during expiration week) that you own in-the-money options that will be exercised at expiration. You’re better off selling the option, especially if there’s some time value left, before expiration. Less cash is involved and commissions are lower as well. In short, less mess.
Selling Options and Expiration
If you are the option seller, you will get exercised if your sold option expires in the money. So you’ll be forced to sell shares for a sold call or buy shares for a sold put. In fact, this can happen at any time.
Technically an option can be exercised whenever the buyer wants, although it would be foolish to do so for one that is out of the money. Even in-the-money options with a good deal of time value in the premium can be exercised, although doing so gives up the time premium. So be aware of that when selling options, and be prepared to carry out the terms of the option contract.
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