Selling options is a good way to generate consistent income in the stock market.
By selling options, you turn yourself into an insurance company and collect premium.
Similar to an insurance policy, the option that you sell has an expiration date.
If an option expires worthless, then its value falls to $0 and the option will be removed from your account.
If an option expires with intrinsic value, or "in the money", then the person who sold the put option will buy 100 shares of the underlying stock at the strike price for every option that they sold.
If the option seller sold a call option that expires in the money, then the option seller will will sell 100 shares of the underlying stock at the strike price for every option that they sold.
For example, let's say that you sold 5 put contracts of AMZN with a strike price of $120. On expiration day, Amazon is trading at $115.
As a result, you'll purchase 500 shares of Amazon at $120 / share.
Remember:
Unlike a stock, each option contract has a set expiration date. The expiration date significantly impacts the value of the option contract because it limits the time you can buy, sell, or exercise the option contract. Once an option contract expires, it will stop trading and either be exercised or expire worthless. Source
A prior blog post touches on options expiration, you can read about that here: https://beststockstrategy.com/what-happens-when-options-expire/
Risks of Options Expiring
One of the biggest risks is that the buying power requirements for options and stocks is not the same.
When selling options, you're usually provided with 2.5x the amount of leverage when using Regulation T (and ~6x the leverage when using Portfolio Margin).
One problem that many traders run into is correlation risk - where numerous option positions will become challenged and in the money, and therefore the trader will run out of buying power and not be able to take assignment.
Running out of buying power is the biggest risk associated with assignment.
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What Happens When Options Expire (Conclusion)
As an option approaches expiry, the contract holder must decide whether to sell, exercise, or let it expire. Options can be in or out of the money.
When an option expires, the associated contract either is no longer valid or it will be converted to short or long stock shares.
Having an option expire is NOT a bad thing, it's just like an insurance company selling an insurance policy.
Frequently Asked Questions (FAQs)
What happens when call options expire in the money?
If a call option expires in the money, the option seller will be forced to sell 100 shares for every contract they sold, in the underlying stock at the strike price.
When do options expire?
Every option has a set expiration date - which is usually a Friday.
What happens when a put option expires?
If a put option expires in the money, the option seller will be forced to buy 100 shares for every contract they sold, in the underlying stock at the strike price.
How Can I Learn More About Options Trading?
When do expired options disappear?
Expired options usually disappear from your trading account the next day, or prior to the opening of the next trading day.
What happens when options expire out of the money?
Expired options usually disappear from your trading account the next day, or prior to the opening of the next trading day.