What happens on expiration day

[elvis]

Just a quick question that has been bugging me. What happens to an option that is in the money on expiration day. Example, I buy a 26 call option for $1, for a stock that is trading at $25. On expiration day, the stock is at $28 and the call option is valued at say $2. Do I have to physically close (sell) the option myself or just let it expire, where I then receive the $2? Probably a pretty simple question, but one that need answered. I am usually a seller of options so this isn't really an issue for me unless I'm in the poo. Thanks.

 

[gooseman]

depends on how the market for that instrument settles. is it cash/physical, does it settle to futures......

 

[intradaybill]

I believe that unless you give instructions to the broker to exercise your option at expiration for the underline, most, if not all, retail options are cash settled.

 

[elvis]

Thanks for the responses and my apologies for not being specific enough. In my example, pretend the stock in question is Microsoft, so intradaybill when you say cash settled, do you mean that I am automaticaly credited the value of the option at expiration? Thanks.

 

[slik]

thats right elvis- cash settled means you get the difference between the strike and the settement price (assuiming its in the money)..... you can then withdraw the cash and get yourself some big ol' burgers and a deepfried peanut butter sandwich!

 

[elvis]

Thanks guys, much appreciated.