Summary of Call and Put Options on Expiry

Now that we’ve had a look at what happens to both Call and Put options on expiry, let’s sum it all up by defining the terms of the agreement that an Option (insurance policy) specifies.

It gave the right (note – not a duty, but a right or an option) to the buyer to acquire the underlying commodity at the agreed upon strike price, and if the price of the commodity exceeds the strike price – then for a Call option, acquire means Buy, for a Put option, Sell.

The buyer can, however, exercise this right anytime he wishes to do so, whether it’s before the expiry date or not. But at any time that the price of the commodity (or whatever the underlying thing is) exceeds the agreed-upon strike price, then the buyer is able to say “you know what, I have had enough, I would like to exercise the right that my policy is giving me” – but he can only do so up until the expiry date. Any time after the expiry date, the contract becomes null and void!

In terms of the trading world, note that this is a highly regulated environment.

Firstly, the insurer cannot duck-and-dive, there is no small print. If price were to exceed the agreed-upon strike price and the insured party wishes to get out – to exercise the right his option is giving him, then he may do so and the insurer has to pay up. The insurer has no choice in the matter.

Secondly, and this is VERY IMPORTANT: On the expiry day, the Exchange will automatically exercise all options which makes sense to get exercised. Thus, if you were the buyer and you forgot to exercise, then there is no “sorry dude -your option expired yesterday, you can’t come with a claim to me today” kind of nonsense – the Exchange would have exercised your option for you on your behalf (if it made sense to – that is to say IF the actual price the commodity traded at, exceeded the strike price of the option). So the buyer is protected.

Does it start to make sense now?

If you bought, then now you have an Option that gives you a guarantee (the right to, the option) to acquire the underlying commodity at the specified strike price on, or before the expiry date, if the actual price exceeds the agreed upon strike price. If you fail to exercise your right and the price does exceed the strike price on the option expiry date, then the Exchange will automatically exercise your right for you on your behalf.