Definition: Letting an option expire because on its expiration date it has no value. Investors say that the option expired “out of the money”.

Example: On June 1, you paid $2 per share for the option to buy shares of XYZ Company for $50 any time up to June 19. When you bought the option, the stock price was $48 and rising. You were sure it would go much higher than $50 by June 19 and that’s why you bought the option. But it turns out that the stock headed back down. On June 19, the stock was trading for $45. There’s no point in exercising your option to buy the shares of the company for $50 from the person who sold you the option when you can just buy them on the open market for $45. Therefore, you will simply abandon your option, letting it expire worthless.

Investeach explains: As if investing in stocks today isn’t risky enough, options represent even greater risk. They are suitable only for people with substantial financial education and investing experience who truly understand them. One of the reasons why options are so risky is that they can, and often do, expire worthless. Compare this to stock investing. For the value of shares you own to become worthless usually means that company had to go out of business.

Riddle me this:

  1. Why would an investor abandon an option?
  2. On what date will the option be abandoned?
  3. Why are options more risky than investing in the stock of the company?