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6 Options Expiration Day Traps to Avoid

Take the following steps to avoid any unpleasant surprises

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#1 Avoid a Margin Call Following Expiration

New traders, especially those with small accounts, like the idea of buying options. The problem is that they often don’t understand the rules of the game, and “forget” to sell those options prior to expiration.

If a trader owns five July 40 calls, makes no effort to sell them, and decides to allow the options to expire worthless, that’s fine. However, if the investor is not paying attention and the stock closes at $40.02 on expiration Friday, that trader is going to own 500 shares of stock. The options are automatically exercised (unless you specifically tell your broker not to exercise) whenever the option is in the money by one penny or more when the market closes on that third Friday.

On Monday morning, along with those shares comes the margin call. Those small account holders did not know they were going to be buying stock, don’t have enough cash to pay for the shares — even with 50% margin — and are forced to sell them. So please don’t forget to sell your long options.

Article printed from InvestorPlace Media,

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