Option Expiry Review

1. Introduction

Options contracts give the holder the right—but not the obligation—to buy or sell an underlying asset at a fixed price before or on a predetermined expiration date. The value of an option is composed of intrinsic value (the difference between the strike price and the underlying price) and time value. As expiry nears, the option's time value normally decays, so a contract's worth depends mostly on the option's moneyness (in‑the‑money (ITM), at‑the‑money (ATM) or out‑of‑the‑money (OTM)). At expiration, most clearinghouses automatically exercise any ITM options. Understanding these mechanics is essential for traders as positions approach expiry.

2. Core Concepts

Term	Key Point
Expiration date	The last day an option contract is valid. Options with later expirations have higher premiums because they include more time value.
Expiration time	The specific time on the expiration date when the contract becomes void; it is distinct from the last time the option can be traded.
Moneyness categories	ITM options have intrinsic value; ATM options have strike prices equal to the underlying's price; OTM options have no intrinsic value and usually expire worthless.
Automatic exercise/assignment	Clearing houses usually auto‑exercise ITM options at expiration. Brokers may submit do‑not‑exercise (DNE) instructions for clients who lack buying power, which forfeits intrinsic value.
Buying power	Exercising a call requires enough cash to buy 100 shares per contract; being assigned on a short call or put requires buying or selling the underlying. Lack of buying power may trigger broker actions (e.g., DNE or closing positions).

3. Purpose of an Option Expiry Review

1Risk Management

2Decision Making

The review clarifies whether to let options expire, exercise them, close them early or roll into later expirations. For instance, consider rolling a position if a trader wants to maintain exposure but avoid immediate assignment.

3Capital and Margin Planning

4Strategy Evaluation

Reviewing expiry outcomes reveals which strategies performed well and which need adjustment. It helps traders refine strike selection, position sizing and timing for future trades.

4. How to Perform an Option Expiry Review

4.1 Gather Position Data

• Identify expiring contracts: Use brokerage platforms or spreadsheets to list all options expiring within a defined period (e.g., one week). Many platforms provide views showing days to expiration and moneyness.
• Categorise by moneyness: For each contract, determine whether it is ITM, ATM or OTM based on current underlying prices. This classification influences whether auto‑exercise or assignment is likely and whether the option has any time premium left.
• Check contract style and settlement: Verify whether contracts are American or European style and whether settlement is equity or cash.
• Monitor market events: Look for upcoming earnings announcements, ex‑dividend dates or economic releases that could affect the underlying.

4.2 Evaluate Potential Outcomes

Long Positions:

• Exercise or sell: If a long option is ITM, decide whether to exercise the right (buy or sell the underlying). Exercising requires sufficient cash or margin.
• Close early: If the objective of the trade has been met or if assignment is undesirable, close the position before expiration.
• Roll: Rolling involves simultaneously closing the current option and opening a new one with a later expiration or different strike. This keeps the position active but extends time.
• Let it expire: Far‑OTM long options generally expire worthless. Unless there is a sudden price move, there is often little value left to salvage.

Short Positions:

• Assignment risk: Short calls or puts can be assigned if they are ITM at expiration. Assignment obligates the trader to sell (call) or buy (put) 100 shares per contract.
• Avoiding assignment: Traders who do not wish to be assigned can close the short option early or roll it to a later expiration.
• Vertical or spread positions: For spreads (e.g., bull call spreads), evaluate whether both legs will be ITM.

4.3 Check Account Buying Power

4.4 Execute the Chosen Strategy

• Exercise or submit DNE: If exercising an ITM long option, ensure the request is submitted before the broker's deadline.
• Enter closing trades: To close an option, place a sell order for long positions or a buy‑to‑close order for short positions.
• Roll the position: Execute a spread order that simultaneously closes the current option and opens a new one.
• Let it expire: For options that are far OTM or when the risk of assignment is acceptable, doing nothing and letting the option expire may be appropriate.

4.5 Post‑Expiration Review

• Confirm account activity: On expiration day, check that all options have been closed, exercised or allowed to expire as intended.
• Assess outcome: Compare the actual results with your expectations—did the option expire worthless, produce a profit, or lead to an unwanted stock position?
• Document lessons: Record what went well and what didn't. Use these lessons to improve strike selection, timing and risk controls for future trades.

5. Tools and Checklists

Brokerage Tools

Many brokers provide calculators and monitoring tools. Use a probability calculator to refine strategy, a profit‑and‑loss calculator to model option strategies and set price alerts.

6. Option Expiry Review in Other Contexts

Outside of financial derivatives, "option" refers broadly to a contractual right to take a future action. In real estate, a put or call option agreement gives a buyer or seller the right to buy or sell property at an agreed price within a defined option period. The option must be exercised during this period; once the option expires, it can no longer be exercised. If the option is not exercised before expiry, it lapses and any option fee paid is usually forfeited. Conducting a review of such options is similar: track upcoming expiration dates, perform due‑diligence on the property, and decide whether to exercise the option based on market conditions, financing and strategic goals.

7. Summary