Expiration, Exercise & Assignment
Expiration risk refers to the potential for an account to acquire a large, unhedged position in an underlying stock or ETF due to the exercise and assignment process at expiration.
Based upon the closing price on the day of expiration, an option may be in-the-money, out-the-money or at-the-money. This will have a strong bearing on the associated risk of that option being exercised or assigned and potentially creating a large, unhedged position in the underlying stock.
Typically, any long options position that is in-the-money by $0.01 or more will automatically be exercised, unless the options holder submits a “Do Not Exercise” (“DNE”) request (which must have been received and confirmed by Options AI not later than 3:00 PM (EST) on the day of expiry.
It should be noted that due to factors including after-hours price movement, there is no guarantee that short options positions expiring out-the-money at the market close will not be assigned. This creates additional expiration risk not just to individual short options contracts but also to option spreads with short option leg(s).
Exercise relates to when you are long options. Having bought options contracts you may exercise your right to buy (long Call) or sell (long Put) the underlying stock at expiration, or at any time during the life of those options. When you are long options, you have control over whether those options are exercised (until expiration when any long options position that is in-the-money by $0.01 or more will automatically be exercised).
Assignment relates to when you are short options. Having sold options contracts you may have an obligation to sell (short Call) or buy (short Put) the underlying stock at any time during the life of the those options. You do not have control over when those options might be exercised by the holder and therefore, being short options puts you at risk of assignment at any time.
Closing long or short options positions prior to their expiration is the only way to fully mitigate the potential risk of exercise or assignment associated with an expiring options contract.
In addition, closing multi-leg options spreads prior to their expiration is the only way to fully mitigate the potential of an otherwise defined-risk options position no longer having defined-risk.
Prior to the day of expiration, Options AI may send notifications to accounts with expiring options as a reminder of the need for the account holder to review positions and take pre-emptive action to mitigate any expiration risk.
After 3:00 pm (Eastern) on the day of expiration, in order for the Options AI team to assess potential expiration risk and take action where it determines is necessary, you may no longer be able to enter closing orders on expiring options positions in your account. During this time, if the Options AI team determines any individual option or a multi-leg options spread to be subject to expiration risk, it may take action to close that position.
It is important to note that while risk management is a key focus for Options AI, you should not rely on us to take action to mitigate any options expiration risk in your account. It remains your sole responsibility.
Put simply, because the risk team is reviewing the position following a corporate action, or working to close the position to mitigate risk. The most common reasons are to mitigate expiration risk or to manage an early assignment.
In short, to eliminate expiration risk or because an account has insufficient funds to maintain a position (such as following an early assignment).
For Debit Call or Put Spreads to expire at max. gain (Spread Width minus Premium paid multiplied by Quantity), all options contracts must expire in-the-money. In other words, the closing price of the underlying stock must be above your upper Call strike for Call Spreads and below your lower Put strike for Put Spreads.
Taking no action in this scenario may result in max. gain as in-the-money options are typically auto-exercised and assigned.
When all options contracts in a Debit Call or Put Spread expire out-the-money, max. loss (Premium paid multiplied by Quantity) occurs.
Taking no action in this scenario may result in max. loss with all options expiring worthless.
Expiration risk increases significantly when a Spread is partially in-the-money at expiration or when the underlying stock is trading sufficiently close to an option strike that there is uncertainty as to whether that option will ultimately be auto-exercised or assigned.
Taking no action in this scenario may result in an unintended long or short position in the underlying stock as well as potentially causing a defined-risk strategy to no longer be defined-risk. Any spread that is determined by the Options AI team to present such risk is subject to discretionary closure.
It is important to note that while the above may represent typical outcomes, short options positions always carry assignment risk regardless of closing in or out-the-money. The only way to fully mitigate this risk is to close options spreads prior to expiration.
For Credit Call or Put Spreads to expire at max. gain (Premium received multiplied by Quantity), all options contracts must expire out-the-money. In other words, the closing price of the underlying stock must be below your lower Call strike for Credit Call Spreads and above your upper Put strike for Credit Put Spreads.
Taking no action in this scenario may result in max. gain with all options expiring worthless.
When all options contracts in a Credit Call or Put Spread expire in-the-money, max. loss (Spread Width less Premium received multiplied by Quantity) occurs.
Taking no action in this scenario may result in max. loss as in-the-money options are typically auto-exercised and assigned.
Expiration risk increases significantly when a Spread is partially in-the-money at expiration or when the underlying stock is trading sufficiently close to an option strike that there is uncertainty as to whether that option will ultimately be auto-exercised or assigned.
Taking no action in this scenario may result in an unintended long or short position in the underlying stock as well as potentially causing a defined-risk strategy to no longer be defined-risk. Any spread that is determined by the Options AI team to present such risk is subject to discretionary closure.
It is important to note that while the above may represent typical outcomes, short options positions always carry assignment risk regardless of closing in or out-the-money. The only way to fully mitigate this risk is to close options spreads prior to expiration.
For an Iron Condor to expire at max. gain (Premium received multiplied by Quantity), all options contracts must expire out-the-money. In other words, the closing price of the underlying stock must be below your lower Call strike on the Call Spread 'wing' and above your upper Put strike on the Put Spread 'wing'.
Taking no action in this scenario may result in max. gain with all options expiring worthless.
When either all Call options or all Put options contracts in an Iron Condor expire in-the-money, max. loss (Call or Put Spread Width less Premium received multiplied by Quantity) occurs.
Taking no action in this scenario may result in max. loss as in-the-money options are typically auto-exercised and assigned.
Expiration risk increases significantly when a Spread is partially in-the-money at expiration or when the underlying stock is trading sufficiently close to an option strike that there is uncertainty as to whether that option will ultimately be auto-exercised or assigned.
Taking no action in this scenario may result in an unintended long or short position in the underlying stock as well as potentially causing a defined-risk strategy to no longer be defined-risk. Any spread that is determined by the Options AI team to present such risk is subject to discretionary closure.
It is important to note that while the above may represent typical outcomes, short options positions always carry assignment risk regardless of closing in or out-the-money. The only way to fully mitigate this risk is to close options spreads prior to expiration.
For an Iron Butterfly to expire at max. gain (Premium received multiplied by Quantity), all short Call and short Put options contracts must expire at-the-money. In other words, the closing price of the underlying stock must be precisely at the center option strikes of the Iron Butterfly. This means expiration risk is frequently increased with an Iron Butterfly given the uncertainty as to whether the short Call or short Put options (or both) may ultimately be assigned.
Taking no action in this scenario may result in an unintended long or short position in the underlying stock as well as potentially causing a defined-risk strategy to no longer be defined-risk. Any spread that is determined by the Options AI team to present such risk is subject to discretionary closure.
When either all Call options or all Put options contracts in an Iron Condor expire in-the-money, max. loss (Call or Put Spread Width less Premium received multiplied by Quantity) occurs.
Taking no action in this scenario may result in max. loss as in-the-money options are typically auto-exercised and assigned.
It is important to note that while the above may represent typical outcomes, short options positions always carry assignment risk regardless of closing in or out-the-money. The only way to fully mitigate this risk is to close options spreads prior to expiration.