The main ways you can close your Option position(s) is by trading your contract, exercising it, letting it expire, or having your contract assigned.
Trading
Buying back a short position or selling a long position is the most common way investors choose to close out of their Option positions, especially if they are in-the-money. Because of the capital required to exercise an Options contract, many choose to close the contract before expiration, allowing them to realize any remaining time value left in the contract, and for those contracts in-the-money, any profits from the increase in the Option's intrinsic value without the need for additional capital or the worry about being short cash or shares.
When can I trade options?
The majority of Options contracts trade Monday - Friday from 9:30 am to 4 pm ET. Index options and some ETF options trade until 4:15 pm ET. PM-settled index options stop trading at 4 pm ET on the day of expiration.
On the day of expiration, you’ll have until 3 pm to open a same-day expiring contract, and until 3:30 pm (Stocks & ETFs) and 4 pm (Indices) to close a same-day expiring contract. For stock & ETF options, Public will automatically cancel any pending orders for same-day expiring contracts at 3:30 pm ET.
Additionally, Public may start attempting to close out any same-day expiring positions that are at risk.
To understand at risk positions, refer to the ‘What happens if I don’t have the shares or buying power to exercise?‘ section below.
Exercise
What does exercise mean?
Exercising essentially means executing your right to buy or sell the underlying equity, or value of the underlying index, at the strike price.
For index options, since they are European-style, you can only exercise your right at expiration.
For stock & ETF options, you can choose to exercise your right any day up to or on the expiration date, which is called “early exercise.” Or, if you don’t take action, your option contract will be automatically exercised at expiration if it is at least one penny in-the-money—a process referred to as the "exercise by exception" by the Options Clearing Corporation.
What happens if I exercise?
Exercising an Options contract depends on the type of Option you own. If you own a call Option, by exercising the contract, you agree to buy shares, or the value of the index, at the strike price. If you own a put Option, by exercising, you agree to sell shares you own at the strike price. For example, if you’re exercising a call Option that involves buying $10,000 worth of stock, you’ll need $10,000 in your buying power to complete the trade—even if you plan to immediately sell the stock. For a put Option, you would need to own the shares you are obliged to deliver or else you would wind up short all of those shares and be in a precarious situation, forced to buy them back at a future price.
How do I exercise?
For index options, if your contract is in-the-money at expiration - even if only by one penny - your contract will automatically exercise at expiration. There is no action that can be taken to mitigate this risk.
For stock & ETF options, if your option is in-the-money at expiration - even if only by one penny - your contract will automatically exercise at expiration, except in certain circumstances where Public must get involved to mitigate risk.
You can also exercise your stock & ETF options early, prior to expiration. To exercise early, reach out to Public’s customer support team either via the Chat or by emailing options@public.com, who will submit the exercise request on your behalf. Please include:
Action statement: “I would like to exercise the following Options:”
Followed by:
Contract (Symbol, Strike price, Expiration date, Call/Put)
Quantity you wish to exercise
Your account number
Any exercise requests after 4pm will be automatically queued for the next trading day, unless it’s on the day of expiration. The exercise request is processed overnight, and your position and balances will be updated on the next business day. Coming soon, you’ll be able to directly exercise your Option in the app.
What happens if I don’t have the shares or buying power to exercise?
It is important to remember that contracts at least one penny in-the-money will automatically exercise at expiration. Given this, if you do not have the necessary buying power or shares, it’s important that you attempt to close that position prior to 3:30pm ET on day of expiration. Remember, it is your responsibility to actively manage the risks associated with your Options positions.
Starting at 3:30pm ET on the day of expiration, if your contract is in-the-money (or within 3% in-the-money) and you do not have the necessary buying power or shares, Public will attempt to liquidate the position on your behalf to prevent you from going into a negative debit balance or being short shares. If for any reason we can’t sell your contract, and you don’t have the necessary buying power or shares to exercise the contract, Public may attempt to submit a Do Not Exercise request to the Options Clearing Corporation (OCC). Do Not Exercise requests are only possible for stock & ETF options; they are not possible for index options.
How does this differ for multi-leg strategies?
Like single-leg strategies, you are responsible for actively managing your multi-leg strategies, and have until 3:30pm ET on day of expiration to close out your multi-leg positions. When managing risk, it’s important to remember that it may be quicker to close a strategy by legging out (buying to close the short and then selling to close the long), rather than placing a multi-leg order. That’s because multi-leg orders require all contracts in the strategy to have sufficient market liquidity, not just the contract you are trying to close out of.
If you still hold the spread after 3:30pm ET, Public will evaluate each spread and determine if Public can let the position(s) expire worthless or must take action to prevent you from going into a negative debit balance or being short shares. It may take action by submitting an order to close the entire strategy with a multi-leg order or submitting a single-leg order to close just one of the legs.
What is a do not exercise (“DNE”) request?
A DNE request is when you ask the OCC to not exercise your Options contract - having it expire worthless. You may ask Public to submit a DNE request on your behalf, or in certain instances, Public may submit one of your behalf as a last resort. DNE requests are typically used by investors as a last resort after they’ve had other failed attempts to close out their in-the-money long Option position, and do not want the contract to exercise. Do Not Exercise requests are only possible for stock & ETF options; they are not possible for index options.
To submit a do not exercise request, email options@public.com with the subject ‘DNE request’ on the day of expiration. In the email, please include:
Action statement: “I would like to submit a do not exercise for the following Options:”
Followed by:
Contract (Symbol, Strike price, Expiration date, Call/Put)
Quantity you wish to exercise
Your account number
Public’s cut-off time for submitting a do not exercise request on your behalf is 4:30pm ET on the day of expiration. All requests submitted are processed on a best-effort basis. Failure to submit a DNE request before our cutoff time may result in in-the-money contract(s) being exercised automatically.
It’s also important to note that even if you submit a DNE request, your position may still be liquidated on the day of expiration.
Expiration
What is expiration?
Each Option contract comes with an expiration date that is determined at the creation of the contract itself.
For stock & ETF options, an option’s expiration date is the last day you can exercise your right to buy or sell the underlying stock at the agreed-upon strike price. If you hold your contract until expiration, and it is either out-of-the-money or in-the-money but you submitted a DNE, the Option will expire worthless. Or in other terms, after the expiration date, the Option contract becomes null and void (has zero value) and is no longer tradeable.
Index options can be exercised only at expiration. This is different than stock & ETF options that can be exercised before and at expiration. If the index option is out-of-the-money at expiration, the option contract will expire worthless; there is no potential to submit an exercise request.
How would my contract expire?
Contracts typically expire in two scenarios. The first, when a contract becomes essentially worthless - the open interest and price drop close to 0. And second (and only for stock & ETF options), if you (or in select circumstances, Public) submit a do not exercise request.
Assignment
What does assignment mean?
Assignment refers to the obligation of an Option seller to fulfill the contract's terms when the option holder, or buyer, chooses to exercise their right. Option sellers are often referred to as option writers, or being short the contract.
When an option holder chooses to early exercise, what are the steps to assignment?
Decision to exercise: Option holders may choose to exercise early when market conditions align, potentially fearing a reversal in stock prices that could erode profits, or wanting to capitalize on an upcoming dividend.
Initial notification: The Options Clearing Corporation is informed upon early exercise, randomly assigning a brokerage client who is short a matching Option.
Assignment notification: The short Option holder is notified by their brokerage about being assigned and is now responsible for meeting the Option contract's terms.
Fulfilling the obligation: Option writers must deliver the underlying asset for call Options or pay for the underlying asset for put Options. This is typically an automated process carried out by brokerages.
Early exercise & assignment are only possible on stock & ETF options.
Aside from early exercise, when else can assignment happen?
As an option writer, there is risk of assignment up until and at expiration (for stocks & ETFs) and at expiration (for index). This is because any option contract that is in-the-money at the time of expiration will be automatically exercised, even if it is only in the money by $0.01, unless the stock or ETF option owner specifically requests to have it not exercised.
Can you provide an example of an assignment?
Let’s take a basic example. Say you've sold a call Option on FlyFit at $50, and sometime after the stock rises to $60. Seeing this favorable condition, a person who bought an Option with the same conditions decides to exercise their right to buy FlyFit shares at $50.
This triggers a notification to the Options Clearing Corporation, which randomly selects a member brokerage, who then randomly nominates you as the Option writer, as you’re short this specific type of contact.
From there, we’ll get in touch and notify you that you’ve been assigned and are now responsible for delivering FlyFit shares at the agreed $50 strike price to the Options holder. In exchange for delivering the shares, you will be paid $50 per share from the Options holder.
When am I at risk of assignment?
Selling Options always carries the possibility of assignment, which is particularly risky if you lack the necessary shares or capital. Preparedness is crucial to navigate potential challenges.
As an investor, you can mitigate assignment risks by buying to close out your positions well before expiration, particularly if the Option is approaching an in-the-money status, providing more control and potential savings.
Additionally, it is important to pay attention to a company’s earnings and dividend dates, as during those times, the risk of assignment may be heightened.
How does exercise, assignment, expiration vary for Stock & ETF vs. Index options?
There are a few key differences worth considering:
Early exercise & assignment: The stock & ETF options offered on Public are American options. The option owner has the right to exercise anytime before and at expiration. This means there is risk of early assignment if you are short, and an opportunity to exercise early if you are long. Index options are European, so the option owner only holds the right to exercise at expiration, not before.
Do-not-exercise: Both Stock & ETF and Index options that are in-the-money at the time of expiration will be automatically exercised, even if it is only in the money by $0.01. For Stock & ETF options, the owner has the ability to specifically request to not have it exercised, typically referred to as a DNE. This option is not available for Index Options. All Index Options that expires in-the-money automatically exercise at expiration
Risk management: For both option types, you are responsible for actively managing your positions. On the day of expiration, you’ll have until 3 pm to open a same-day expiring contract, and until 3:30 pm (Stocks & ETFs) and 4 pm (Indices) to close a same-day expiring contract. For stock & ETF options, Public will automatically cancel any pending orders for same-day expiring contracts at 3:30 pm ET. For index options, your pending orders will automatically cancel at 4 pm for same-day expiring contracts.
Position effect: Options on Stocks & ETFs involve buying or selling underlying shares of the asset, or in other words, a transfer of shares and/or cash. However, options on Indices involve buying or selling the underlying value of the index - there is no transfer of shares, purely a transfer of cash. Given this, Public’s close-out logic differs for Indices since it is based purely on buying power. Public will typically not close out index options contracts, unless it is part of a calendar spread or poses large notional risk to the client or the firm.
For further questions contact Member Support via in-app chat or email at support@public.com.
Options carry significant risk and are not suitable for all investors. Options investors can rapidly lose the value of their investment in a short period of time and incur permanent loss by expiration date. Certain complex options strategies carry additional risk. There are additional costs associated with option strategies that call for multiple purchases and sales of options. Supporting documentation for any claims will be furnished upon request. Prior to buying or selling an option, investors must read and understand the “Characteristics and Risks of Standardized Options,” which can be found at: public.com/ODD. See full terms of the Options Order Flow Rebate Program at public.com/disclosures/rebate-terms. Rebate rates are subject to change for new and existing enrollees.