Consequences of Not Selling a Call Option Before Expiration
The decision to hold a call option beyond its expiration date can have significant financial implications. Whether you're trading call options with the intention to profit from an asset's rise in value, understanding the potential outcomes of not selling can help manage your financial risk effectively. This article provides a comprehensive guide to what can happen if a call option is not sold before its expiration.
Understanding the Status of a Call Option
A call option grants the holder the right to purchase a predetermined amount of an underlying asset at a specified price (the strike price) within a certain timeframe. The status of a call option at expiration—be it In-the-Money (ITM), At-the-Money (ATM), or Out-of-the-Money (OTM)—determines the potential outcomes for the holder. Each scenario has distinct implications, which we will explore below.
In-the-Money (ITM) Call Option
When a call option is ITM at expiration, the underlying asset’s price is above the strike price. In this scenario, the holder can exercise the option and buy the asset at the predetermined strike price, thus profiting from the difference between the market price and the strike price.
Example:
Suppose you hold a call option to buy QQQQ at $250, and on expiration, QQQQ's closing price is $260.Exercising this option would allow you to buy QQQQ at $250, profiting $10 per , if your brokerage supports automatic credit, your account can be credited with the difference, net of regulatory fees, such as $1,000 for a 1000-share contract.It's important to note that you can only exercise ITM options; OTM options will result in no action and no credit.
At-the-Money (ATM) Call Option
An ATM call option occurs when the underlying asset's price is equal to the strike price at expiration. At this point, the option is neither in nor out of the money and typically expires worthless.
Example:
Suppose QQQQ closes at $250, exactly equal to the strike price of your call option will expire worthless, and you'll lose the premium paid.Brokerage Policies and Fees
Some brokers have specific policies regarding the automatic exercise of options. It's crucial to check your broker's rules and any associated fees.
Out-of-the-Money (OTM) Call Option
When a call option is OTM at expiration, the underlying asset's price is below the strike price. In this case, the option will expire worthless, and you will lose the premium paid.
Example:
Suppose QQQQ closes at $240, below the strike price of your call option at $ option will expire worthless, and you'll lose the premium paid.No further action or credit will be made to your account.
Impact of Recent Tax Reforms
Importantly, recent tax reforms have reduced potentially significant tax liabilities. If you forgot to square up your call option before expiration in the past, you could face substantial tax obligations. However, under the new tax regime, the impact is notably lower, even if you forget to do so.
For instance, any profits from exercising ITM options are now taxed at reduced rates, making the option of automatic credit more attractive.
Conclusion
The decision to hold a call option past its expiration date can lead to various outcomes, depending on the status of the option at that time. Understanding these scenarios is crucial for managing risk and maximizing potential profits. It is always advisable to review and adhere to your broker's policies and fee structures to avoid any unexpected financial burdens.