What Happens When Puts Expire for Buyers and Sellers?

A put option is a financial contract giving the buyer the right, but not the obligation, to sell an underlying asset at a predetermined price (the strike price) on or before a specified expiration date. Options have a finite lifespan, and their expiration dictates their final value and the subsequent actions for both buyers and sellers. Understanding these outcomes is important for options trading.

Expiration Scenarios for Put Buyers

When a put option expires, its value and the buyer’s actions depend on the underlying asset’s price relative to the strike price. An “Out-of-the-Money (OTM) Put” occurs when the asset’s price is above the strike price at expiration. In this situation, the put option has no intrinsic value, as selling at the strike price would be disadvantageous. The option expires worthless, and the buyer loses the premium paid.

An “In-the-Money (ITM) Put” occurs when the underlying asset’s price is below the strike price at expiration. This means the option has intrinsic value, allowing the buyer to sell the asset at the higher strike price for a potential profit. For equity and ETF options, ITM puts are subject to automatic exercise by the Options Clearing Corporation (OCC). This exercise ensures the buyer realizes the option’s value.

An “At-the-Money (ATM) Put” occurs when the underlying asset’s price is equal to or very close to the strike price at expiration. ATM puts typically expire worthless due to negligible or zero intrinsic value. While ITM options are automatically exercised, buyers can instruct their broker not to exercise an ITM option if the costs of exercising outweigh the intrinsic value.

Expiration Scenarios for Put Sellers

For individuals who sell, or “write,” put options, expiration brings considerations centered around “assignment.” Assignment refers to the obligation for the put seller to purchase the underlying asset at the strike price if the put option they sold is exercised by the buyer. This obligation becomes active when the put option is in-the-money (ITM) at expiration. If the market price of the underlying asset falls below the strike price, the buyer will likely exercise their right to sell, obligating the seller to buy those shares.

The financial implications for the put seller in an assignment scenario can be significant. The seller is required to purchase shares at the strike price, which is now higher than the current market price of the underlying asset. For example, if a seller wrote a put with a $50 strike price and the stock closes at $45, they would be obligated to buy shares at $50, incurring an immediate loss of $5 per share, offset partially by the premium originally received. This potential for substantial losses underscores the risk associated with selling uncovered put options.

If the put option expires out-of-the-money (OTM) or at-the-money (ATM), the seller faces no assignment obligation. In these instances, the underlying asset’s price is at or above the strike price, meaning the put option holds no value for the buyer and will not be exercised. The seller then retains the entire premium received from selling the option, representing a profit from the transaction. The seller’s maximum gain on a sold put option is limited to the premium collected, while potential losses can be considerable if the underlying asset’s price declines sharply.

Settlement Processes

Upon expiration, the practical mechanics of how put options are settled depend on the type of option and the underlying asset. For equity and exchange-traded fund (ETF) options, in-the-money (ITM) contracts are subject to automatic exercise by the Options Clearing Corporation (OCC). This automatic exercise occurs for equity options that are ITM by at least $0.01 per contract at expiration. The process is designed to ensure that investors realize the intrinsic value of their expiring ITM options without needing explicit action.

Settlement methods generally fall into two categories: physical delivery and cash settlement. Physical delivery is the most common method for equity options, where actual shares of the underlying stock are transferred. For a put option, this means the seller is obligated to buy the specified number of shares (typically 100 shares per contract) at the strike price, and the buyer sells those shares. Cash settlement is used for index options and certain other derivatives where the underlying asset is not easily delivered. In cash settlement, the difference in value between the strike price and the underlying asset’s closing price at expiration is paid in cash.

The timing of settlement for options exercised at expiration typically occurs on the next business day. For example, if options expire on a Friday, the settlement of the shares or cash would generally take place on the following Monday.