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Expiration

I haven’t written about the process of expiration.

I haven’t written about the process of expiration. As this is expiration week, I thought it would be a good time to discuss the mechanics of how an option expires and stock ownership is transferred.

In my personal account, I have the Abbott Laboratories (ABT) April 38 Buy-Write. I bought the stock for 38.06 and sold the April 38 call for $0.80.

The last day to trade April options is this Friday, May 16. After the close on Friday, the options expiration process will begin. So how does this process really “work?”

The owner of the in-the-money call that I sold will send an exercise notice to his broker saying he wants to exercise his right to buy the stock at 38.

His broker then will send notice of exercise to the Options Clearing Corporation (OCC), basically the mechanism that enables this process.

Once the OCC receives the notice, it then notifies my broker letting them know that I have to deliver the shares.

Thus the long stock position that I currently hold will be transferred back to the OCC, who will then forward on to the owner of the ABT call.

We can assume, as long as ABT closes above 38 on Friday, my long stock position will be taken away from me as the owner of the April 38 call will exercise his right to buy the stock. This will leave me without a stock or option position on Monday, and I will have collected the maximum profit on this position of $74 per buy-write, or a 2% return.

I will not actually have to do anything on Friday as the options process is automated through my brokerage company and the OCC.