Expiration Process and Risks
Expiration, Exercise, Assignment, and Associated Risks
This article contains some basic facts about the options expiration process and the risks associated with options exercise, assignment, and expiration. Please note that the information provided below is not exhaustive and that additional risks beyond those discussed below may exist. You should fully understand the risks of trading options before you trade. For more information, please read the Characteristics and Risks of Standardized Options. If you have any questions about the exercise or expiration process, please contact Customer Support.
Automatic Exercise of In-the-Money Options
The Options Clearing Corporation (OCC) will automatically exercise any expiring options that close $0.01 in-the-money or more on Expiration Day. In-the-money is defined as the stock’s official OCC closing price being $0.01 HIGHER than the Strike Price for call options or $0.01 LOWER than the Strike Price for put options. You may also choose not to exercise in-the-money options that would otherwise be automatically exercised by entering do-not-exercise instructions through the E*TRADE platform before 4:30 PM CT / 5:30 PM ET on the Expiration Date. Any instructions submitted to E*TRADE by telephone are processed on a best-efforts basis. If you fail to provide sufficient time for an E*TRADE broker to assist, your expiring options may still be exercised.
Exercise of Out-of-the-Money Options
The OCC will not automatically exercise expiring options that close in-the-money by less than $0.01 or which are out-of-the-money. These options may still be exercised, but you are required to enter an exercise request through the E*TRADE platform before 4:30 PM CT / 5:30 PM ET on the Expiration Date to exercise these options. Any requests submitted to E*TRADE by telephone are processed on a best-efforts basis. If you fail to provide sufficient time for an E*TRADE broker to assist, your expiring options may not be exercised.
Short Out-of-the-Money Options May be Assigned
The holder of a long options position may choose to exercise the options contracts even if they finish out-of-the-money. In some cases, exercising out-of-the-money options may be economically beneficial due to stock price changes in the extended hours session. If you are short options which appear out-of-the-money, there is no guarantee that you will NOT be assigned those contracts.
Short In-the-Money Options May Not Automatically be Assigned
The holder of a long options position may choose to NOT exercise the options even if they finish in-the-money. In some cases, it may be economically beneficial not to exercise an in-the-money option due to stock price changes in the extended hours session. If you are short options which appear in-the-money, there is no guarantee that you will be assigned those contracts.
Exercises, Assignments and Your Account Equity
You should review your positions prior to expiration to determine whether you have adequate equity in your account to carry the underlying position prior to exercising options. You should also determine whether you have adequate equity in the account if a short options position is assigned to your account. It may make sense to close positions in expiring options prior to the market close to avoid the risks if you do not have adequate capital in your account, or if you do not want to bear the risks associated with a long or short stock position. Also, you should consider the possibility that you may be assigned on a short option position even if the option is out-of-the-money.
E*TRADE May Buy or Sell in Your Account to Manage Expiration Risk
E*TRADE reserves the right to liquidate or cover expiring option positions which would result in undue risk and/or margin deficit related to exercise or assignment.
Accounts with insufficient equity on hand prior to exercise or assignment are subject to unwarranted risk of adverse price change in the underlying security upon delivery. To protect against the excessive risk of an adverse movement in the underlying security, E*TRADE may intervene to mitigate the risk on your behalf. Such intervention may include closing out existing positions, buying, or selling stock against expected exercises or assignments, or entering “Do Not Exercise” instructions for positions expiring in-the-money. Any losses incurred from actions taken to mitigate risk are the sole responsibility of the account holder.
E*TRADE initiates expiration-related liquidations two hours prior to the market close but does reserve the right to begin the process sooner or later if conditions warrant any alteration. If E*TRADE deems it necessary to take action in your account to mitigate risk potential exercise/assignment risk, you will be responsible for any market losses and will be charged broker assist fees.
E*TRADE is under no obligation to manage such risks and we expect each customer to actively manage and mitigate the potential risks involved with expiring option positions. Failure by a customer to effectively manage the risk of expiring positions may also result in the account being restricted from opening new positions to limit any further increase in exposure.
Spreads and Expiration Risk
Spread positions can have unique expiration risks associated with them. An expiring spread where the long leg of the spread is in-the-money by less than $0.01 and the short leg of the spread is in-the-money more than $0.01 may require special attention on your part to manage the expiration risks. You are responsible for managing this risk and all other risks associated with any unhedged spread legs that expire in-the-money. If you do not want to exercise an expiring in-the-money leg of a spread, you must enter do-not-exercise instructions through the E*TRADE platform before 4:30 PM CT / 5:30 PM ET on the Expiration Date. Any instructions submitted to E*TRADE by telephone are processed on a best-efforts basis. If you fail to provide sufficient time for an E*TRADE broker to assist, your expiring in-the-money leg of a spread may still be exercised.
The Assignment Process
E*TRADE processes the assignments made by OCC to customers with short options positions on a random basis. E*TRADE will process assignments and exercises in your account on the first eligible day following expiration.
Managing Risks Following Expiration
You may need to review your account and manage any positions that generate margin charges, and the risk resulting from exercises or assignments on the trading day following expiration. You are responsible for any positions created in your account as a result of the expiration process. If you do not take appropriate action, you may receive a margin call or E*TRADE may liquidate positions in your account.
Early Exercise of Options
If you wish to exercise an option contract prior to the last business day before expiration (“Expiration Day” typically Friday but note below)** you must enter an exercise request through the E*TRADE platform by 4:30 PM CT / 5:30 PM ET on the Expiration Day. Failure to do so will result in the contracts not being exercised on that business day. This is especially critical if you intend to exercise call options on the business day prior to an ex-dividend date to own stock and be eligible to receive the dividend. Any requests submitted to E*TRADE by telephone are processed on a best-efforts basis. If you fail to provide sufficient time for an E*TRADE broker to assist, your contacts may not be exercised on that business day.
Options on halted securities may not be automatically exercised or assigned regardless of whether they are in-the-money. Holders of long option positions in halted securities may need to make an independent determination of the value of the option deliverable in deciding whether to exercise or not. Holders wishing to exercise an option on a halted security will need to notify E*TRADE with their instructions to exercise before 3:30 PM CT / 4:30 PM ET (subject to holiday schedules) on the expiration day. Please also note that E*TRADE may impose higher margin rates on these securities, and may ensure availability of funds sufficient to sustain hard-to-borrow fees before honoring exercise instructions if the exercise would result in a short underlying position.
** Expiration Day typically occurs Friday, or Thursday if that is the last trading day of the week.
Certain securities may also have Monday and Wednesday Expiration Dates.