I had a covered call position with QQQ opened a few weeks ago with a strike price of $480. For most of the time it was out of the money but last week the stock jumped to the mid $470's so I decided to buy back to close a few days before the expiry date, which is today. I pocketed a couple hundred dollars by closing my position early but gave up some money since the option still had time value.
On expiry day (today), QQQ closed at exactly my strike price. This has never happened to me before. Even though I no longer had an option position, I was curious as to the practical implications of an option closing at exactly the strike price: Does it get called? Does it just expire worthless since it technically has $0 value. If the former, since I had a covered call position, that would be very unfavorable for me as the underlying stock holder because that would result in capital gains.
I did a bit of digging and found the following (thanks to Perplexity):
When an option closes exactly at its strike price on the expiration date, it is considered "at-the-money" (ATM). Here's what typically happens in this scenario:
1. For practical purposes, the option is usually treated as if it expired worthless. This is because there is no intrinsic value to be gained by exercising the option[4].
2. Most brokers and clearing houses have specific rules for handling ATM options at expiration. Generally, they will not automatically exercise ATM options[1].
3. For call options:
- The holder has the right to buy shares at the strike price, but since the market price is the same, there's no immediate profit in exercising[4].
4. For put options:
- The holder has the right to sell shares at the strike price, but again, with the market price being the same, there's no immediate benefit in exercising[4].
5. Any remaining time value in the option will disappear at expiration[4].
6. If the option is not exercised, it will simply expire worthless and cease to exist[1][5].
7. In some rare cases, depending on the specific rules of the exchange or clearing house, ATM options might be automatically exercised. However, this is not common practice[1].
It's important to note that in real-world trading, it's extremely rare for an option to close exactly at its strike price. Usually, it will be slightly above or below, which would make it either marginally in-the-money or out-of-the-money.
Traders holding ATM options at expiration should be aware of their broker's specific policies and may need to provide explicit instructions if they wish to exercise an ATM option, as it typically won't happen automatically.
Citations:
[1] https://www.vectorvest.com/blog/options/what-happens-when-stock-options-expire/
[2] https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/put-call-options/v/option-expiration-and-price
[3] https://www.reddit.com/r/CoveredCalls/comments/13w3nbm/selling_covered_calls_what_happens_if_they_hit/
[4] https://www.investopedia.com/ask/answers/051115/what-happens-when-security-reaches-its-strike-price.asp
[5] https://www.tastylive.com/concepts-strategies/options-expiration
[6] https://financhill.com/blog/investing/what-happens-when-an-option-expires-in-the-money
[7] https://www.reddit.com/r/interactivebrokers/comments/18ogs8g/what_happens_if_i_buy_the_call_option_i_sold/
[8] https://www.schwab.com/learn/story/options-expiration-definitions-checklist-more