Here's the skinny on options expiration. Options do expire at 4 p.m. EST on the third Friday of the month in the sense that they no longer trade. Here's the catch - the stocks themselves do keep trading after hours!
So what could be an in-the-money (ITM) close at 4 p.m. on Friday can be out-of-the-money (OTM) by 5 p.m., or vice versa. Not knowing this one minor detail can be the difference between making money and losing money.
Check out this old chart of AMZN earnings gap to get an idea of just how far a stock can move overnight.
Exercising ITM Options
While there are a couple differences between how brokers look at ITM options these days, most ITM options will be automatically exercised based on the 4 p.m. closing price. Some may now be automatically exercised even if they are as little as a penny ITM - while other brokers have different requirements.
Regardless of wether you choose to exercise your option or not, you have to make the decision fast! Even though options technically don’t expire until noon on Saturday (again not when they are last traded in the open market), you need to make your final decision ASAP.
Most brokers require you to contact them by 5:30 p.m. EST on Friday or they will make the decision for you.
What About Index Options?
Some index options are referred to as "cash-settled," meaning the options occur primarily in the underlying instrument and at expiration cash changes hands, not necessarily the underlying security.