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Asked a question last year

Is it necessary to close out open long option positions on expiry?

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Well, it depends on whether the position is ITM or OTM as well as whether the position is in index or stock options. If Out-of-the-Money (OTM) index and stock option positions are open at expiration, they would expire worthless. In this case, the holder will lose out on the premium paid upfront.

Meanwhile, for index options that expire In-the-Money (ITM), the settlement would be done on the intrinsic value portion of the option and profits/losses would be adjusted accordingly.

However, if ITM stock options are open at expiration, they will be compulsorily exercised by way of physical settlement of shares. The price at which the settlement would take place is the strike price of the respective option contract, while the quantity would be equal to number of lots * the lot size.

For ITM calls that are open at expiration, the holder will take delivery of shares by paying the total value (strike price * number of lots * lot size); whereas for open ITM puts, the holder will have to give delivery of shares and will receive the total value. Hence, if you have an open long position in stock option and if that position is ITM, it would be better to close out the position well before expiry (unless of course your objective is to give or take delivery of shares!).

To understand in detail how all this works out and to know what our policies regarding physical settlement of stock options (and stock futures) are, I highly suggest you read this blog of ours by clicking here45.