Exercise, Assignment and Expiration Day

Expiration day: in the money means automatic exercise

At expiration, options at least $0.01 in the money are usually exercised automatically by the broker for the buyer; the exchange then randomly picks a seller to deliver, which is called assignment. Out-of-the-money options simply expire worthless.

Exercise turns into shares and cash

Exercising 1 Call = pay “strike × 100” in cash and receive 100 shares; exercising 1 Put = hand over 100 shares and receive cash. The seller gets the exact opposite, so before expiration, make sure your account has enough cash or shares.

American vs European

An American option can be exercised any time before expiration (most US single-stock options work this way); a European option can only be exercised on the expiration date. But exercising early throws away the time value, so to cash in a profit it's usually better to just sell the option.

Key takeaways

• At expiration, options that are in the money by at least $0.01 are usually exercised automatically; out-of-the-money options simply expire worthless.
• Exercising a call = pay cash, receive shares. Exercising a put = deliver shares, receive cash. The assigned seller does the opposite.
• American options can be exercised any time before expiration; European options only on the expiration date.
• Exercising early only captures intrinsic value and throws away time value. To take your profit, selling the option is usually better.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. “Expiration date” + “Buy Call”, stock at $104: how do your shares and cash change? What's the delivery worth on the spot?
2. Switch to “Sell Put” and drag the stock to $95: were you assigned? What did your account gain and lose?
3. Drag the stock to $100.00 and $100.50: which price triggers automatic exercise? (Buy Call)
4. Switch to “Before expiration” + “Buy Call”, stock at $104 with 30 days left: how much more do you get by selling than by exercising? Drag the days down to 1: what does the gap become?

Quiz and explanations

1. On expiration day the stock is $104 and you hold 1 call with a $100 strike that you haven't closed. What happens?

Answer: It's auto-exercised: you pay $10,000 and receive 100 shares.In-the-money options are auto-exercised: you buy 100 shares at $100 × 100 = $10,000 (worth $10,400).

2. A put you sold has been assigned. What does that mean?

Answer: You must buy 100 shares at the strike.When a put buyer exercises, they're "selling to you". As the seller, you must buy at the strike.

3. With 30 days left, the stock is $104 and a $100-strike call trades at $5.86. How much is the difference per contract between exercising early and simply selling it?

Answer: Selling gets you $186 more.Exercising only captures intrinsic value: $4 × 100 = $400. Selling gets $5.86 × 100 = $586. The extra $186 is time value.

Terms in this lesson

• American option (American Option): An option that can be exercised on any trading day before expiry; most US single-stock options are American.
• assignment (Assignment): When a buyer exercises, the exchange randomly picks a seller to deliver: a call seller must hand over shares, a put seller must buy them.
• European option (European Option): An option that can only be exercised on its expiration date; many index options are European.
• exercise (Exercise): When an option buyer uses their right, buying (call) or selling (put) the underlying at the strike price.
• intrinsic value (Intrinsic Value): What you'd get by exercising right now; for a call, max(stock price − strike, 0).
• out of the money (OTM) (OTM): An option with no intrinsic value, such as a call whose strike is above the stock price.
• time value (Time Value): The part of an option's price above its intrinsic value, reflecting the chance it gains value before expiry; it melts away over time.