Investment and Financial Markets

When Do Call Options Expire and What Happens Next?

Understand the crucial lifecycle of call options. Learn what happens from their initial purchase to the precise events and outcomes at and after expiration.

All options contracts, including call options, are financial instruments with a finite lifespan. They have a set expiration date beyond which they cease to exist. Understanding this time-limited nature, particularly the expiration process, is fundamental for anyone engaging with options.

Call Option Basics and Expiration Concepts

A call option grants the holder the right, but not the obligation, to purchase an underlying asset at a predetermined price, known as the strike price, by a specific date. This specific date is referred to as the expiration date, marking the final day the contract remains valid and can be exercised. The value and potential outcome of a call option at expiration depend heavily on the relationship between the underlying asset’s market price and the option’s strike price.

A call option is considered “in the money” (ITM) when the underlying asset’s price is higher than the strike price. Conversely, it is “out of the money” (OTM) if the underlying asset’s price is below the strike price. If the underlying asset’s price is exactly equal to the strike price, the option is “at the money” (ATM).

In the United States, most standard equity options are American-style, meaning they can be exercised at any point between the purchase date and the expiration date. This differs from European-style options, which can only be exercised on the expiration date itself. The flexibility of American-style options provides holders with various strategic choices leading up to expiration.

Expiration Day Procedures

For most U.S. equity options, the standard expiration day is the third Friday of the expiration month. If this Friday happens to fall on a holiday, the expiration date is typically moved to the preceding Thursday.

Trading in most options contracts typically ceases at 4:00 PM Eastern Time (ET) on expiration day. However, the actual expiration time, when the contract officially becomes void, is often cited as 11:59 PM ET. This distinction between the trading cutoff and the ultimate expiration time is important for understanding when positions can no longer be adjusted through market transactions.

The Options Clearing Corporation (OCC), which guarantees options contracts, has an “exercise cut-off” time, generally 5:30 PM ET, by which brokers must submit final exercise instructions. Most brokerage firms, however, set an earlier internal deadline for their clients to submit “do not exercise” (DNE) instructions, often around 4:30 PM ET.

A significant procedure on expiration day is “automatic exercise,” also known as “exercise by exception.” The OCC automatically exercises any expiring call option that is in the money by $0.01 or more based on the underlying stock’s official closing price. However, holders can submit contrary instructions to their broker if they wish to prevent the automatic exercise of an in-the-money option. Options that are out-of-the-money or at-the-money at expiration are not automatically exercised and typically expire worthless.

After Call Option Expiration

For call options that expired in the money and were exercised, the holder will receive shares of the underlying stock at the specified strike price. The standard settlement period for stock transactions is T+1, meaning the delivery of shares generally occurs one business day after the exercise date.

Conversely, call options that expired out of the money or at the money simply expire worthless. In these cases, the contract ceases to exist, and the option holder loses the entire premium initially paid for the option. No shares are delivered, and there are no further obligations or actions related to that specific contract.

Previous

What Are Base Rates and How Do They Affect You?

Back to Investment and Financial Markets
Next

What Is a Primary Residence Loan & How to Qualify