Options on stocks and exchange traded funds ETFs are American style options and trade until the closing bell rings on the 3rd Friday of the month specified in the option contract. They expire early the next morning. If you are short an option, you learn whether you have been assigned an exercise notice before the market opens for trading the next business day — or Sunday, if you have online access to your account.
When you exercise a call option , you buy shares of the specified stock, paying the strike price per share. When you exercise a put option , you sell shares at the strike price. This is pretty simple stuff and although option rookies may have questions, most investors understand the process.
Some of the most actively traded options are European style. Investors must be aware of the differences between European and American options. This is one of those details that you ignore at your peril. European options cannot be exercised prior to expiration da y, whereas American style options can be exercised any time before the option expires.
This property of European options benefits option sellers. The investor who sold calls becomes short stock instead of options.
If you owned a spread position, one part of the spread has been covered. This is a very bad situation. European options settle in cash. No stock changes hands. When you exercise European style options, you receive the cash value of that option. Cash settlement works like a charm. You own 4 SPX Oct calls. The price you paid is not relevant. The official closing price called the settlement price of SPX for the October expiration is Thus, the call is in the money by 6. This is effectively the same as selling your options at parity intrinsic value.
With American style options, the settlement price is the closing price. As a result, you will often hear of accusations of wrongdoing as those who lost money violently protest. An understanding of the rules is important. An investor, who learns that the options are still alive, recognizes there may be a problem. Assume the market opens higher Friday morning and that the first posted SPX price is Imagine the anguish when the settlement price is posted approximately 1PM, Eastern Time and the price is This cannot happen to you if you remember to buy back your short European options Thursday afternoon or earlier.
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