Can You Trade Options on Expiration Day?

Options traders often wonder if they can still buy or sell contracts on expiration day. The short answer is yes, but the risks and dynamics are very different from earlier in the contract’s term. With little time left, price movements can be extreme, requiring quick decisions.

Understanding how options behave on their final trading day is essential to avoid costly mistakes. Several factors influence pricing and execution, making it important to know what to expect before placing a trade.

Trading Opportunities Until Market Close

Options remain tradable until the market closes, but liquidity and bid-ask spreads can shift dramatically. Market makers and institutional traders adjust positions, often leading to wider spreads and reduced order depth. This can make execution difficult, particularly for out-of-the-money contracts or those with low open interest.

Trading availability depends on the exchange and product. Standard equity options on U.S. exchanges typically trade until 4:00 PM Eastern Time, while some index options, such as those on the S&P 500 (SPX), have different cutoff times. Weekly and quarterly expirations may follow unique schedules, requiring traders to verify exact deadlines.

Order types and execution speed are crucial as expiration nears. Market orders risk unfavorable fills due to widening spreads, while limit orders may not execute if the price moves too quickly. Traders exiting positions often prioritize immediate execution, while those initiating new trades must account for the limited time for the position to develop.

Price Volatility Factors

On expiration day, option prices can swing sharply due to gamma, implied volatility shifts, and sudden changes in the underlying asset. With little time left, gamma—an option’s sensitivity to price changes—peaks, making small stock or index movements significantly impact premiums, especially for at-the-money contracts.

Implied volatility can behave unpredictably. While it often declines as time value diminishes, unexpected news or macroeconomic events can trigger last-minute spikes, reviving seemingly worthless options. Conversely, implied volatility crush can render previously valuable contracts nearly worthless if market expectations fail to materialize.

Pin risk adds another layer of uncertainty. When an option’s strike price is close to the underlying asset’s market price, there’s uncertainty about whether it will finish in or out of the money. Traders and market makers managing large positions may aggressively hedge exposure, causing sudden price swings in both the option and its underlying asset. This effect is particularly pronounced in high-profile stocks or index options with significant open interest.

Exercise vs. Closeout

Deciding between exercising an option or closing out the position before expiration depends on costs, tax implications, and margin effects. Many traders prefer to sell or buy back contracts rather than exercise, as taking delivery of the underlying asset may require significant capital. For example, exercising a call option on a high-priced stock demands substantial funds, which may not be feasible for retail traders.

Transaction costs also matter. Brokerage firms often charge extra fees for exercising contracts, and assignment on short options can lead to unexpected margin obligations. American-style options, which can be exercised before expiration, add uncertainty, particularly for traders selling covered calls or cash-secured puts. If an option is automatically exercised due to being in the money, traders must ensure they have the necessary funds or margin capacity to handle the resulting position.

Tax treatment further complicates the choice. Exercising a call option to buy stock resets the holding period for capital gains tax purposes, while selling the option outright results in a short-term gain or loss. Index options, often settled in cash, may have different tax implications under Section 1256 of the Internal Revenue Code, where 60% of gains are taxed as long-term capital gains and 40% as short-term, regardless of holding period.

Late-Day Settlement Timelines

As expiration nears, traders must understand settlement processes, particularly for cash-settled and physically settled options. Misunderstanding these mechanics can lead to unintended positions or unexpected capital requirements.

For cash-settled options, such as those on the S&P 500 (SPX) or Nasdaq-100 (NDX), the final settlement price is based on the official closing print of the index, which may differ from the last traded price. Even small discrepancies can affect profit or loss calculations.

For physically settled equity options, settlement occurs through the transfer of shares when an option is exercised or assigned. Most U.S. exchanges follow an automatic exercise threshold, typically set at $0.01 in intrinsic value. However, brokers may have their own policies, requiring explicit instructions to prevent automatic exercise. Additionally, stock settlements follow the T+2 rule, meaning shares from exercised contracts will not be available for trading until two business days later, which can impact liquidity planning.

Margins and Capital Requirements

Trading options on expiration day introduces unique margin and capital considerations, particularly for short positions or complex multi-leg strategies. As expiration approaches, margin requirements can fluctuate based on risk, and brokers may impose stricter requirements to account for heightened volatility. Traders who sell options without sufficient collateral may face margin calls if the underlying asset moves unfavorably, potentially leading to forced liquidations at disadvantageous prices.

For cash-secured puts and covered calls, brokers typically require full collateral to ensure the trader can fulfill obligations if assigned. However, naked short positions, such as selling uncovered calls, carry theoretically unlimited risk, prompting brokers to demand significantly higher margin reserves. Portfolio margin accounts, which assess risk based on overall exposure rather than fixed percentage requirements, may offer more flexibility but require substantial balances and brokerage approval. Understanding these requirements is essential to avoid unexpected capital shortfalls or forced liquidations as expiration nears.