What happens if I sell a put option and it expires in the money?
When a put option expires in the money, the contract holder's stake in the underlying security is sold at the strike price, provided the investor owns shares. If the investor doesn't, a short position is initiated at the strike price.
The option is worth $5 and the trader has made a profit of $4.20. If the stock price is at or above the strike price at expiration, the put is “out of the money” and expires worthless.
The maximum loss possible when selling or writing a put is equal to the strike price less the premium received.
If you don't sell your options before expiration, there will be an automatic exercise if the option is IN THE MONEY. If the option is OUT OF THE MONEY, the option will be worthless, so you wouldn't exercise them in any event.
You do not have to hold till expiration, but by taking the opposite side of the contract you can close the position early. It just costs money to close the position, basically you are buying the exact option you sold so as to net yourself out.
A put option is a contract that gives its holder the right to sell a set number of equity shares at a set price, called the strike price, before a certain expiration date. If the option is exercised, the writer of the option contract is obligated to purchase the shares from the option holder.
Options contracts are valid for a certain amount of time. So if the owner doesn't exercise their right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price.
The Bottom Line
When options expire, in-the-money options are typically exercised automatically, leading to the purchase or sale of the underlying asset at the strike price. Meanwhile, out-of-the-money options expire worthless, resulting in the loss of the premium paid by the holder.
The absolute worst-case scenario for a put sale is that you are forced to buy a stock whose market price goes to zero, in which case you'll never be able to re-sell it at all, and you'll have to accept the complete loss of the money you paid to buy it at the strike price.
As a Put Buyer, your maximum loss is the premium already paid for buying the put option. To reach breakeven point, the price of the option should decrease to cover the strike price minus the premium already paid. Your maximum gain as a put buyer is the strike price minus the premium.
Can you get rich selling put options?
Yes, you can make a lot of money selling put options, but it also comes with significant risk. To increase their ROI, options sellers can deal in more volatile stocks and write options with a more alluring strike price and expiry date—this makes each trade both risker and more valuable.
Traders would sell a put option if they are bullish on the asset's price and sell a call option if they are bearish on the price. "Writing" refers to selling an option, and "naked" refers to strategies in which the underlying security is not owned and options are written against this phantom security position.
If you hold an in-the-money short put on the expiration date, the underlying is booked long into your securities account at the strike price. If the short put is out of the money or at the money, it expires worthless and no exercise takes place.
The decision you make will be influenced by the situation in question. Ideally, you'd be in the money before the expiration date and exercise the option. However, if that isn't the case, you can either sell the contract or let it expire worthless.
Option value is zero so the premium paid is the loss incurred. Option value is zero so the premium paid is the loss incurred.
There are three traditional ways of exiting an options position. Exercise the position, allow the position to expire worthless, or offset it. Most traders choose the later and reverse the order to close, just like they traditionally do with stocks.
Option Auto-Exercise Rules
Stock options that are in-the-money at the time of expiration will be automatically exercised. For puts, your options are considered in-the-money if the stock price is trading below the strike price.
The purchaser of an American-style option owns the right to exercise (buy or sell the underlying security at the predefined price) at any time up until the expiration date. The seller of the option is obligated to meet the terms of the contract. However, it does not always make sense to exercise the option.
Out-Of-The-Money (OTM)
If this happens, the trader would lose all value paid for the option up front and realize max loss. Prior to expiration, the trader can exit the position by selling it for the market value.
If the stock price is above the strike price of the put at expiration, then the put expires worthless and the premium is kept as income. The investor must then decide whether to buy the stock at the current price or to sell another put or to invest the cash elsewhere.
Can you sell a put option before it hits the strike price?
Can I sell an option below strike price? Options that have value in the marketplace can be bought or sold at any time, whether the underlying price of the stock is below or above the options strike price.
If your Option expires OTM, it expires worthless. ITM Options are settled at their Intrinsic Value.
With stocks, each put contract represents 100 shares of the underlying security. Investors do not need to own the underlying asset for them to purchase or sell puts. The buyer of the put has the right, but not the obligation, to sell the asset at a specified price, within a specified time frame.
Occasionally a stock pays a big dividend and exercising a call option to capture the dividend may be worthwhile. Or, if you own an option that is deep in the money, you may not be able to sell it at fair value. If bids are too low, however, it may be preferable to exercise the option to buy or sell the stock.
In the case of options contracts, you are not bound to fulfil the contract. As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller.
