What happens when your option contract expires

What happens to all options when they expire?

First, "Most options traders don't want to buy or sell the underlying stocks."

This is totally wrong

Perhaps the problem is that you are only familiar with the BUY side of options trading.

On the sell side of options trading, an option switch deals with DELTA HEDGING. When we sell an option to a customer. We will also buy a reasonable amount of Underlyings that corresponds to the option's delta position.

During the term of the option. We will adjust our hedging position if the delta changes (those who follow Black Scholes will know that this is usually due to (underlying) price changes).

However, we lose money with every underlying change (we have to cross the bid-ask spread for every trade). That is why we lose money when there is volatility. That is why we are called "Short VEGA" or "Short Volatility".

One way to think about "buying" options is to have you pay someone to perform a particular trading strategy.

In general, those who sell options are also happy to buy back options (at a discount, of course, so we can make a profit). In doing so, however, we have to reduce our hedging position, which in turn generates costs (for us, the bank).

In the end. As this is "money" batch swap rather than funding. They are most likely referring to "warrants" rather than "options" listed on exchanges. Exchanges in most regions give us very specific and restrictive rules that we have to adhere to. A very common one is that we MUST always quote a price at which we are willing to buy back the warrants (which may not be an unreasonable spread from the sell price).

Since an option is a synthetically created investment vehicle, when we buy back the option from the investor, we simply dissolve the underlying hedging positions with which we have synthesized the options.

Source: I worked as a desk developer on a warrant desk for 2 years.

Jeremy Foster

Thanks @Aron. I'm new to money.stackexchange.com. I don't know what you mean by "instead of finance". I hope I am not in the wrong forum to ask this question. However, I am referring to options that are traded on exchanges and I don't know what warrants are. I've been told that "most traders don't really want to buy or sell the underlying asset". You answered how options contracts are sold and bought, but I think I understand. My only question is why does it work every month for anyone trying to close their options position to do so.

Aron

@JeremyFoster My point was that if you are using "money" then you are probably a private investor rather than working in IBanking for example. In my market, exchange traded options are called warrants (while real options are traded on a derivatives exchange or OTC). In warrants trading, we are banks of market makers, which means that we HAVE to buy all the warrants that are offered to us (this is one of the conditions for listing on the stock exchange). We always want to close your position as delta hedging is a risky business.

Bob Baerker

The OP asked if options traders want to own the stock. The answer to this is mostly NO and the proof is that according to the OCC only 7% of all options have been exercised. That means 93% of them have expired or were closed before they expired. The description of how market makers and trading desks hedge their positions in a delta-neutral way is a smaller part of the market. Many traders do just that and trade options.

Aron

@ BobBaerker Maybe we have very different ideas about "traders". Additional exotic desk traders will use options for gamma hedging and exchange the underlying for delta hedging. Options and cash trades are not mutually exclusive. A lack of understanding of the risk profiles results in many retail customers losing enormous amounts of money.

Bob Baerker

To reiterate, 93% of options will be closed or worthless before they expire. Only 7% are exercised. This is evidence that option holders "do not want to buy or sell the underlying stocks". It is unusual to imply that 100% of the short positions on the other side of the OI are "exotic desk traders" hedging gamma and delta. They are in the minority right from the start, especially since many retail customers are also on the short side.