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Google Options Expiration Dilemma


You're allowed to let options expire worthless -- but be warned.


Minyan Al writes:

A rookie question: I sold four Google (GOOG) 560 October expiring naked calls recently and now it's going to come down quite a bit today. I think it might get down to 0.10 or even 0.00 (as long as Google doesn't go above 560). Do I still have to buy it back?

What if at the end of the day (expiration), Google stays about $558 and I still get assigned with the option. I'll have to come up with $400 x 558 to give this person his shares. Can someone do that? Can someone ask for buying the shares although the market value of the shares is below the strike?

Let's say I wanted to buy Google on Friday and didn't get filled. And on Saturday, I thought, "well...lets just get it through the guy who sold me the call option at $560." In that case, I'll have to find a lot of money and buy shares and give him that.

Could this be possible?

Minyan Al asks: "Do I still have to buy it back?" You never have to buy it back. You're allowed to let the options expire worthless. But be warned: Some brokers will force you to buy the options before the market closes on expiration Friday. They don't allow any customers to own a position that can result in a margin call due to an exercise. So Minyan Al would have to ask his broker if he's allowed to watch the options expire worthless.

If Minyan Al is truly a rookie, I'm wondering why he's selling naked call options -- and why his broker allows that. It's a pretty risky strategy. Google is up to the mid 540s before the market opens, and the market futures are lower. If this market turns around -- and I'm not saying it will -- Google could easily run past $560. Far higher. It may be a "waste" of money, but it's certainly worth paying $0.05 of $0.10 to get those options out of his account. If he wants to buy them, he should enter an order before the market opens. But a limit order -- never a market order.

If he doesn't want to "waste" the money, he's not obligated to buy them.

And no -- he's not buying the stock, and doesn't need cash. He needs assets to meet the margin requirement. He'd have a short position of 400 shares. My guess is he cannot meet the margin requirement for that, and his broker will force him to buy the stock on Monday. Why take that risk? Who knows what the price will be at that time?

There's almost zero possibility that Minyan Al would be assigned if Google is less than $559.99. But yes, someone can do that. The call owner has the right to exercise the option any time prior to expiration. The actual stock price determines whether the call owner will elect to buy the stock at the strike price. But no one can prevent the person from exercising. It's his/her option and you have no voice in determining if/when the option will be exercised.

And Saturday is too late to exercise the option. Friday afternoon is the deadline.

But this is key: If Minyan Al doesn't really understand how this works, or the risks he was taking when he sold those options, he shouldn't have made this trade.

This is important: Please understand all the risk and reward potential for any trade before you get involved. It's not a trivial matter.

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No positions in stocks mentioned.

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