What if an Option expires Out of Money

Options are a form of derivates that allow you to trade on leverage i.e. on borrowed money. They offer extraordinary returns if your bet is successful but can end up costing a lot if it expires out of money

The article below explains what happens when an option expires out of money. 

Contents

Options Expiry –

In the Money and Out of the Money

ITM and OTM when an option expires

If you look at the infographic provided above, there are two key things that one must understand if you wish to know how options work.

The two terms are: 

  1. In the Money
  2. Out of the Money

Before determining whether you have made money or not, you need to know whether you’re ‘In the Money’ or ‘Out of the Money.’ 

When are you In the Money? 

If you have placed a Call Option

and the stock price is above the strike price, the option is in the Money. 

If you have placed a Put Option

and the stock price is below the strike price, the option is in the Money. 

When are you Out of Money?

If you have placed a Call Option

and the stock price is below the strike price; the option is out of the Money.

If you have placed a Put Option

and the stock price is above the strike price; the option is out of the Money.

What happens when an Option expires OUT OF MONEY

Above, we have tried to simplify the confusion that arises when people cannot identify whether they’re in the money or out of the money. 

Just identification is not enough; you need to contextualize it with your bet. 

Call Option expires out of money

If you are the buyer - you will lose money, premiums, commissions etc. 
If you are the seller - you will make money. 

Put Option expires out of money 

If you are the buyer - you will lose money. 
If you are the seller - you will make money. 

Below, we have provided situations when you make money. 

  • Call Option + Long position (stock price above the strike price)

 = In the Money, i.e., you can exercise your trade and make money. 

  • Put Option + Short Position(stock price below the strike price)

 = In the Money, i.e., you can exercise your trade and make money.

Conclusion – 3 options

Only In the Money options make money.

In the case of Out of Money options, there are 3 options available to you. 

  1. Either you let it expire. You basically lose money. 
  1. Or you sell it at a higher premium. (only when its approaching expiration)  You will make money only if somebody else believes it is worth more/the stock can climb higher than the strike price. 
  1. Finally, you can exercise the option.

Leave a Reply