Option Expiration

I want to describe some scenarios for exiting out of an option trade.
For example, assume that you are in a spread trade that expires this month (long an option and short an option on the same stock). If both strike prices are "in the money," then do nothing since they offset each other. If both strike prices are "out of the money," then do nothing since they will both expire worthless. If the stock price is between the option strike prices, then it will be necessary to close the option that is "in the money."

Let's show some examples:

Scenario #1
If you are in a spread trade and both options are going to end up "in the money," then do nothing (same day substitution will occur and they will get exercised for each other).

Example: You are long the 60 calls and short the 65 calls with the stock at $70. Over expiration weekend, these options would offset each other and you would receive the 5.00 ($500/contract) into your account. Why? You have the right to buy the stock at 60 and an obligation to sell at 65. You do so over the weekend (same day substitution) and the gain comes into your account automatically.

Scenario #2
If you are in a spread trade and both options are going to end up "out of the money," then do nothing (they will both expire worthless).

Example: You are long the 60 calls and short the 65 calls with the stock at $55. Over expiration weekend, these options expire with no action taken because your right to buy at 60 and obligation to sell at 65 are both worthless.

Scenario #3
If you are in a spread trade and one option is "in the money" while the other is going to end up "out of the money," then you must close the "in the money" option as it would be exercised into stock.

Example: You are long the 60 calls and short the 65 calls with the stock at $63. Over expiration weekend, the 60 strike call still has value because you have the right to buy at 60 and the stock closed worth 63. Your broker knows this is valuable and will exercise the option for you. This means that you buy the stock, paying $60/share (strike price amount) for an asset worth $63. The obligation to sell at 65 is worthless and expires. IMPORTANT: If you don't want the stock position, then you must always close any "in the money" option that is not offset by stock or an opposing option. So, in this example, you would need to sell the 60 strike call (sell it) so that it will not be exercised into a stock position.

Here is a breakdown of what options become if exercised into a stock position:

Long calls exercise into a long stock position.
Short calls exercise into a short stock position.
Long puts exercise into a short stock position.
Short puts exercise into a long stock position.