At expiration, one of two things happens: the option is in the money and gets exercised, or it's out of the money and disappears. There is no middle ground.
If a call option is in the money (stock price above the strike) at expiration, it is automatically exercised. This means you buy 100 shares at the strike price. Your brokerage does this for you — you don't need to take any action.
If a put option is in the money (stock price below the strike) at expiration, it is automatically exercised. You sell 100 shares at the strike price. If you don't own the shares, your brokerage will short-sell them on your behalf, creating a short stock position in your account.
This is important to understand: automatic exercise happens by default for any option that is $0.01 or more in the money at expiration. If you don't want to be assigned 100 shares (calls) or short 100 shares (puts), you must close the position before the market closes on expiration day.
If the option is out of the money at expiration — a call with a strike above the stock price, or a put with a strike below the stock price — the option expires worthless. It disappears from your account. You lose the premium you paid and nothing else happens.
The most common expiration mistake is holding an in-the-money option through expiration without realizing it will be exercised. If you bought a $200 call for $3.00 and the stock closes at $200.50 on expiration day, your option is automatically exercised. You now own 100 shares at $200 — $20,000 of stock. If you didn't have $20,000 in your account, your brokerage may issue a margin call or liquidate the position at the next open, possibly at a loss.
The rule of thumb: if you don't want to own (or short) 100 shares, close your option before 4:00 PM ET on expiration Friday.
Multi-leg positions require extra care. If you have a bull call spread ($200/$210 calls) and the stock closes at $205 at expiration, your long $200 call is in the money (exercised — you buy 100 shares at $200) and your short $210 call is out of the money (expires worthless). You end up owning 100 shares, which may not be what you intended.
Most brokerages will automatically close both legs of a spread before expiration if there's assignment risk. Check your brokerage's expiration policy before letting spreads ride into expiry.
Stock prices can move after the market closes at 4:00 PM ET, but options are settled based on the closing price. If a stock is at $199.90 at 4:00 PM (your $200 call expires worthless) but then rises to $201 in after-hours trading, you missed out. Conversely, if the stock drops after hours, an exercised option could result in an immediate loss when the market opens.
Model your expiration scenarios with the Options Profit Calculator to see exactly where your P/L stands at any stock price.