The option is out of the money by one penny because the price to purchase was dropping , and this market maker MM did not get the stock price they wanted.
FAQs - U.S. Securities Option Expiration
However, because of the buyer's protection against a large loss the 20 XYZ 50 calls expired, the risk of holding a short stock position is not what the market maker prefers to do. Thus, the buyer exercises the calls. That is acceptable for this trader and is better than carrying risk over the weekend. Carrying the risk over the weekend is a term for not exercising when the market closes on Friday.
Consider that news of the short close is issued Friday after the market closes. Monday's opening price for the stock will most likely be lower than Friday's closing price, increasing the losses for the MM if they did not exercise on Friday.
The price will be lower because demand would drop over the weekend. Call and put owners investors that purchased options to buy or sell at certain prices who learn about the pending short close before the cutoff time for option exercise about p. ET begin to take action. Owners of slightly OTM call options notify their broker to not exercise those options. Also, owners of slightly ITM in the money put options will instruct their brokers to not exercise. Neither of these moves is automatic. To exercise an OTM option, or allow an ITM option to expire, you must notify your broker before that broker's cutoff time.
This worst-case scenario is not one that happens very often. It is meant to help you understand the exercise of OTM options, the effect it can have, and how to reduce the risks of call and put options. By Full Bio Follow Linkedin.
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Follow Twitter. Read The Balance's editorial policies. The Balance uses cookies to provide you with a great user experience. Remember that 1 put option contract equals shares of the underlying stock. Selling a put option allows you to collect a premium from the put buyer.
Call options & put options
Regardless of what happens later on in the trade, as the put seller, you always get to keep the premium that is paid up front. With cash-covered puts, the profit potential has 2 components: the option trade, and if the stock gets assigned. The most you can make from the option trade is the premium. If the stock is assigned and you are given ownership, your upside is potentially unlimited if the stock moves higher.
The Dangerous Lure of Cheap Out-of-the-Money Options
You can see how the risk involved with a cash-covered put differs from using a limit order to buy a stock. To learn more about put options and how they work, take a minute to watch a short video on Selling puts. Use this educational tool to help you learn about a variety of options strategies.
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Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk.
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For the Last Time: Stock Options Are an Expense
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