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:

  • We’ll typically attempt to exercise any option in the money if your account has the required buying power. Please note that exercising or selling your options contract is ultimately your responsibility. We don't guarantee that we'll do so.
  • If you don’t have enough buying power to exercise your option, we’ll typically 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 the customer’s 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 at the close, Robinhood will typically attempt to 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 in the money or at risk of being 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 typically attempt to sell the option. For example, if you have 10 contracts, but enough cash to only buy 500 shares, we’ll typically 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 in the money or at risk of being 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 typically attempt to sell the option. If you have 10 contracts and 500 shares, we’ll typically attempt to sell 5 contracts and allow the remaining 5 contracts to be exercised for a total of 500 shares.

If you have a spread about to expire:

  • If both legs are expected to be in the money, or deemed not at risk of being in the money at the market close, we’ll typically take no action.
  • If only one leg is at risk of being in the money or in the money, we'll typically attempt to 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 typically attempt to submit a Do Not Exercise request to the Options Clearing Corporation (OCC), and your contract will expire worthless.

To determine if an option position is “at risk of being in the money,” Robinhood will calculate an upper and lower bound for the underlying stock’s close price on the expiration date. If your option’s strike price falls within these parameters, it’s considered “at risk of being in the money”’ and we’ll typically place an order to close your position.

Exercise

How to Exercise

If your option is in the money, Robinhood will typically automatically exercise it for you at expiration. If you’d like to exercise early, you can do so within the app.

If you’d like to exercise your option before expiration (in app):

  1. Navigate to the options position detail screen
  2. Tap Exercise

You’ll then be guided through steps to exercise your contract.

Note

If you exercise your option between 12:00 AM – 4:00 PM ET, your exercise will be submitted immediately and you won’t be able to cancel. If you exercise your option after 4:00 PM ET, it will be queued for the next trading day, and you’ll have until 11:59 PM ET to cancel the order.

How to Confirm

Once you exercise an option, you’ll see a card on 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 OCC.

Assignment

When you are assigned, you have the obligation to fulfill the terms of the contract. When you sell-to-open an options contract, you can be assigned at any point prior to expiration, regardless of the underlying share price.

Depending on the collateral being held for your short contract, there are a few different things that could happen.

If you’re assigned on a covered call:

The shares you have as collateral will be sold to settle the assignment. No additional action is necessary.

If you’re assigned on a cash-secured put:

The buying power you have as collateral will be used to purchase shares and settle the assignment. No additional action is necessary.

If you’re assigned on the short leg of a call spread:

If you’re assigned on the short leg—the call contract you sold—of your spread, you have the obligation to sell shares of the underlying stock at the strike price. In this case, the long leg—the call option you bought—should provide the collateral needed to cover the short leg.

If your long leg is In the money

You can exercise the long leg of your spread, purchasing the shares you need to settle the assignment.

Example: You enter a XYZ call spread, so you buy one call contract of XYZ (the long leg) and sell one call contract of XYZ (the short leg).

When you’re assigned, you provide the shares necessary to settle the contract, so your account is now short 100 shares of XYZ. To cover the short position in your account, you can exercise the XYZ call contract you bought and receive 100 shares of XYZ.

If your long leg is out of the money

You’d sell the long leg of your spread, then separately purchase the shares you need to cover the assignment.

Example: You enter a XYZ call spread, so you buy one call contract of XYZ (the long leg) and sell one call contract of XYZ (the short leg).

When you’re assigned, you sell the shares necessary to settle the assignment, so your account is now short 100 shares of XYZ. You can’t exercise the long leg to cover that position in your account since it’s out of the money. Instead, you sell the call contract you own, then separately buy 100 shares of XYZ to settle the short leg.

If you're assigned on the short leg of a put spread:

If you’re assigned on the short leg—the put contract you sold—of your spread, you have the obligation to buy shares of the underlying stock at the strike price.

If your long leg is in the money

In this case, the long leg—the put contract you bought—should provide the collateral needed to cover the short leg. When you exercise the long leg of your spread, you can sell shares to recover the funds you used to settle the assignment.

Example: You enter a XYZ put spread, so you buy one put contract of XYZ (the long leg) and sell one put contract of XYZ (the short leg).

When you’re assigned, you have to buy 100 shares of XYZ and have less funds than before. To recover those funds, you can exercise the XYZ contract you own to sell the 100 shares of XYZ you just purchased, receiving money back from the sale.

If your long leg is out of the money

You can sell the long leg of your spread, then separately sell the shares you need to cover the assignment.

Example: You enter a XYZ put spread, so you buy one put contract of XYZ (the long leg) and sell one put contract of XYZ (the short leg).

When your short leg is assigned, you buy 100 shares of XYZ, which may put your account in a deficit of funds. You can’t exercise the long leg to cover the deficit in your account since it’s out of the money. Instead, you can sell the put contract you own, then separately sell the 100 shares of XYZ you just received from the assignment to help cover the deficit in your account.

To learn more about calls, puts, and multi-leg options strategies, check out Advanced Options Strategies (Level 3).

Early Assignment

If you’re trading a multi-leg options strategy and are assigned on your short position before expiration, there are a few additional considerations to keep in mind.

Decrease in Buying Power Early assignment may result in decreased buying power. This is because the positions you hold are used to calculate your buying power, and at the time you’re assigned you may not have the shares (for call spreads) or buying power (for put spreads) needed to cover the deficit in your account. If you have an account deficit, you can’t open new positions until the deficit is resolved.

Account Deficits Early assignment may also result in an account deficit if it causes you to use more buying power than you have available. When you have an account deficit, there are a few potential actions that you can take, including exercising your long contract or buying/selling shares by placing orders. If you have an account deficit and choose to exercise your long contract to increase your buying power, you may not be able to open new positions while your exercise is pending. If exercising your long contract is sufficient to cover your account deficit, you should be able to open new positions once your exercise has been processed.

Margin Calls Early assignment may also result in margin call if it causes your account value to fall below your margin maintenance. When you have a margin call, there are a few potential actions that you can take, including exercising your long contract or buying/selling shares by placing orders. If you have a margin call and choose to exercise your long contract to decrease your margin deficiency, your margin call may still persist while your exercise is pending. If exercising your long contract is sufficient to cover your margin deficiency, any margin calls should be lifted once your exercise is processed.

Early Assignment and Exercise Note that we can’t process an early assignment before the end of the trading day, and therefore can’t exercise the long leg until the next trading day at the earliest. This is because the Options Clearing Corporation (OCC) doesn’t notify us that you were assigned until after market close, when they process assignments. Funds and shares from exercises are available immediately during market hours. If you exercise a position after market hours, your exercise will be queued and credited on the next trading day.

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's price 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 $20 (the strike price), it’s at 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 above $100, though you wouldn’t break even until it hits $102.

Pending Shares

If Your Option is Exercised Before Expiration or Exercised by the OCC

If your option is exercised prior to the expiration date, or your option is exercised automatically by the OCC, a few things can happen, depending on the time.

If the exercise happens between 12:00 AM – 4:00 PM ET, the associated shares will be released immediately. This means that you shouldn’t see any pending shares in your account from this exercise.

If the exercise happens after 4:00 PM ET, it will be queued, and the associated shares will remain pending until the exercise is cleared.

If Your Option is Assigned by the OCC or Automatically Exercised on Expiration

Once your contract has been exercised or assigned, we’ll hold the associated shares or cash collateral until we receive confirmation from the OCC that all aspects of the exercise have cleared. You’ll be able to trade the associated shares on the trading day after the exercise is cleared.

If something you’re not assigned on an in-the-money call or put 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.

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 out the following dividend in the future:

  • Ex-Date: 10/1/2020
  • Record Date: 10/2/2020
  • Pay Date: 10/31/2020
  • Amount: $1.00

If you’re short, or you’ve written 1 option contract for ABC expiring on or after 10/1/2020, there is a risk that you will be assigned.

For example, if you get assigned on 9/30/2020, when the market opens on 10/1/2020 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.

Example

ABC will pay a $1.00 dividend and the ex-dividend date is 10/01/2020. You hold 100 ABC $100 Calls 10/01/2020, 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 help 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 10/01/2020, on 09/30/2020 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 10/01/2020, there is a chance the app will block you since there is a high probability this call would be assigned.

Disclosures

Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Robinhood Financial does not guarantee favorable investment outcomes and there is always the potential of losing money when you invest in securities, or other financial products. Investors should consider their investment objectives and risks carefully before investing. To learn more about the risks associated with options, please read the Characteristics and Risks of Standardized Options before you begin trading options. Please also be aware of the risks listed in the following documents: Day Trading Risk Disclosure Statement and FINRA Investor Information. Examples contained in this article are for illustrative purposes only. Supporting documentation for any claims, if applicable, will be furnished upon request.

Reference No. 1392736
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