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Expiration, Exercise, and Assignment

Expiration, Exercise, and Assignment

Expiration

What it Means

Unlike a stock, each options contract has a set expiration date. This date figures heavily into the value of the contract itself, as it sets the timeframe for when you can choose to buy, sell, or exercise the contract. Once an options contract expires, the contract itself is worthless.

What Happens

As the expiration date of your option contract nears, there are a few important things to keep in mind:

  • You can’t open a position the day the contract expires. All options contracts are set to position-closing-only status the day before expiration.
  • We’ll automatically exercise any option in the money if your account has the required buying power.
  • If you don’t have enough buying power to exercise your option, we’ll attempt to sell the contract in the market for you about 1 hour before it expires.
  • Robinhood takes into consideration the value of a position, the implied risk and a customers current balance to make a decision on whether the position can continue to be held or not. In some cases, Robinhood believes the risk of holding the position is too large, and will close positions on behalf of the customer.

If your option is in the money, Robinhood will automatically exercise it for you at expiration unless:

  • You don’t have sufficient buying power.
  • Doing so would result in a short stock position.

If you have a long call about to expire:

  • If the contract is at risk or in the money, we’ll assess your account to see if you have enough cash to buy the shares.
  • If you don’t have enough cash to buy the shares, we’ll attempt to sell the option. For example, if you have 10 contracts, but enough cash to only buy 500 shares, we’ll attempt to sell 5 contracts and allow 5 contracts to be exercised for a total of 500 shares.

If you have a long put about to expire:

  • If the contract is at risk or in the money, we’ll assess your account to see if you have enough shares to sell.
  • If you don’t have enough shares, we’ll attempt to sell the option. If you have 10 contracts and 500 shares, we’ll attempt to sell 5 contracts and allow the remaining 5 contracts be exercised for a total of 500 shares.

If you have a spread about to expire:

  • If both legs are in the money, or not at risk of being in the money, we’ll take no action.
  • If one leg is at risk or in the money, we'll close the spread or match the option with another form of collateral (like cash or stocks) and let you exercise it.

Once your contract expires, we’ll remove it from your home screen. You can view your expired contracts in your account history.

Note

If for any reason we can't sell your contract, and you don’t have the necessary buying power or shares to exercise it, we'll submit a Do Not Exercise request, and your contract will expire worthless.

To determine if an options position is “at risk,” Robinhood will calculate an upper and lower bound of a spread being closed at expiration. If your option’s strike price falls within these parameters, it’s considered “at risk”’ and we’ll place an order to close your position.

How we calculate the upper bound:

  • Today’s High + (4% × Maintenance Requirement × Today’s High)

How we calculate the lower bound:

  • Today’s Low - (4% × Maintenance Requirement × Today’s Low)

Example:

  • You own an XYZ 1/1/2020 $10 Call
  • XYZ’s high on the day is $9.95 and its low is $8.
  • XYZ is a 25% maintenance ratio equity

The upper bound would be $10.05 and the lower bound would be $7.92. Since the call falls within these bounds, we’ll close the position.

Keep in mind that we reserve the right to adjust what we consider “at risk” at any time.

Exercising

How to Exercise

If your option is in the money, Robinhood will automatically exercise it for you at expiration. If you’d like to exercise early, send us a request and we’ll reach out as soon as possible.

How to Confirm

Once you exercise an option, you’ll see a card in your home screen letting you know that your option was exercised, and that your associated shares are pending. You’ll also receive an email and push notification before the next trading session, confirming that your option was exercised or assigned, once we receive confirmation from the Options Clearing Corporation.

The cost to exercise? On Robinhood, we don't charge any commission, exercise fees or assignment fees but keep in mind that regulatory fees still apply to shares sold as a result of contracts that are exercised or assigned.

Assignment

When you’re assigned, you have the obligation to fulfill the terms of the contract. When you choose to sell to open an option position, the buyer has the right to exercise their option. If the buyer exercises, you’re assigned. You can be assigned at any time between when you sell to open the option and when it expires, though you’ll typically be assigned on the day of the contract’s expiration if it’s in the money. This is why we’ll hold collateral to make sure you can cover your contract in case you’re assigned on it. The only way to avoid being assigned on an option you’ve sold is to buy back the position. To learn more, check out our Options Knowledge Center.

In the Money and Out of the Money

These designations refer to the position of the underlying stock’s price relative to the strike price of the option.

  • A call option is in the money if the underlying stock is above the option’s strike price.
  • A put option is in the money if the underlying stock trades below the option’s strike price.
Example

A $20 Call option for MEOW stock that you paid a $1 premium for would hit its break-even point when MEOW reaches $21 in the market, and it would be in the money at $20.01. However, when MEOW stock is trading in the market at $19.99 or below, the call option would be out of the money because it’s trading below the strike price. If it’s trading right at the money at $20, it’s out of the money.

Keep in mind that an option contract being “in the money” doesn’t necessarily mean that its owner will make a profit if she were to exercise it. If you buy a $100 Call option at a $2 premium, your call is in the money when the stock trades at $101, though you wouldn’t break even until it hits $102.

Pending Shares

Once your contract has been exercised or assigned, we’ll hold the associated shares until we receive confirmation from the Options Clearing Corporation that all aspects of the exercise have cleared. You’ll be able to trade the shares before the market opens the day after expiration.

If something unusual occurs, like if you’re not assigned for an in-the-money call you sold, the pending state will be removed and your shares will be adjusted based on the updated information.

Finding Your Trade Details

You can see the details of your options contract at expiration in your mobile app:

  1. Tap the Account icon in the bottom right corner of your screen.
  2. Tap History.
  3. Tap the option you’re looking for (e.g. MEOW $1,200 Call 10/21 Exercise).

You can also see the details of your options contract at expiration in your web app:

  1. Click Account in the upper right corner of your screen.
  2. Click History.
  3. Scroll to find the option you’re looking for (e.g. MEOW $1,200 Call 10/21 Exercise).

Options Dividend Risk

One of the biggest risks of options trading is dividend risk. Dividend risk is the risk that you’ll get assigned on your options position the night before the dividend’s ex-date. When this happens, you’ll open the ex-date with a short position and actually be responsible for paying that dividend yourself. You can avoid this by closing your position before the end of the regular-hours trading session the night before the ex-date.

Example

ABC will pay out the following dividend in the future:

  • Ex-Date: 10/1/2018
  • Record Date: 10/2/2018
  • Pay Date: 10/31/2018
  • Amount: $1.00

If you’re short, or you’ve written 1 option contract for ABC expiring on or after 10/1/2018, there is a risk that you will be assigned.

For example, if you get assigned on 9/30/2018, when the market opens on 10/1/2018 you would have a short position of the 100 shares that were exercised by the counterparty (a person who bought and exercised the call option).  In this case you’ll have to pay the dividend that is associated with these shares to the other party.

In this example, you’ll owe $1 x 100 shares = $100. We’ll automatically deduct the dividend amount from your account, even if it causes you to have negative cash.

You can avoid this risk by closing your option before the market closes on the day before the ex-date.

The day before the ex-dividend our brokers may take action in your account to close any positions that have dividend risk. Generally, we’ll only take action if your account wouldn’t be able to cover the dividend that would be owed after an assignment.

Example

ABC will pay a $1.00 dividend and the ex-dividend date is 10/01/2018.  You are short 100 ABC $100 Calls 10/01/2018, if assigned on all 100 calls, you would owe $10,000 to cover the dividend payment. If your account currently has a value of $5,000, you wouldn’t be able to cover the dividend. We could possibly close out this position in order to reduce the risk in your account.

The day before the ex-dividend, we’ll block users from selling to open new short call options that are likely to be assigned that same night due to the symbol ex-dividend date being the next date. This is only temporary and you can open new short call positions on, or after,  the ex-dividend date.

Example

ABC will pay a $1.00 dividend and the ex-dividend date is 10/01/2018, on 09/30/2018 the app will block you from opening certain short call positions. If ABC is currently trading at $120 and you wanted to sell 1 ABC $50 Call 10/01/2018, there is a chance the app will block you since there is a high probability this call would be assigned.

Reference No. 20190710-876533-2693903
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