Every option will end when the corresponding closing transaction takes place, when the option is used, or when it expires. Both of these things have different effects on buyers and sellers.
What it means for the buyer
- If you let the option run out, you will lose the whole amount of the premium you paid when you bought the option. It will be a huge waste.
- If you use the option, you will get 100 shares (if it's a call) or sell 100 shares (if it's a put) at the strike price. You will only exercise when it makes sense to do so based on the stock's current market value. For a call option to be worth exercising, the market value must be greater than or equal to the strike price (of a put). At that time, you'll have to pay the striking price plus trading fees to buy stock for less than what it's worth on the market.
- If you close out your open long position with a closing sale, you will get paid. If the closing price is higher than what you bought it for, you made a profit. If it's lower, you lost money.
What Happened for the Seller
- If your option is exercised by the buyer, you have to deliver 100 shares of the underlying stock at the specified strike price (of a call) or buy 100 shares of stock at the specified strike price (of a put) (of a put). As a person who sells calls, exercise means that shares are called away. As a put seller, when the option is used, shares are given to you. In either case, when you exercise, you get to keep the premium you got for going short, which changes your net cost.
- If you close your open position by buying something, you have to pay the premium. If the price you pay to close a position is less than what you got when you opened it, you make a profit. If it's more, you lose money.
- If the option expires without any value, you make money. Your open position is closed when the option expires, and you get to keep the premium you got when you sold the option.
In the options market, the best way to find opportunities is to look at all the possible outcomes. It is important to look at both risks and opportunities. To be a good options trader, you need to be a smart analyst.
