It’s pretty common for some option premiums to end at 0 on expiry day, and this can confuse a lot of people, especially if they’re new to options trading. The truth is, there are specific reasons why this happens, and it all comes down to how options work and certain market dynamics.
One of the biggest reasons is time value decay. As the expiry day progresses, the time value of an option drops very quickly. By noon on expiry day, options that are more than 2% out-of-the-money (OTM) have almost no time value left. This happens because there’s not enough time for the underlying asset’s price to move in a way that benefits the option. Without this potential, the premium just keeps falling.
Another reason is that OTM options don’t have intrinsic value. For an option to have real value, it needs to be in-the-money (ITM). For example, a call option is ITM when the spot price is above the strike price, and a put option is ITM when the spot price is below the strike price. If an option stays OTM at the end of the day, it expires worthless, and the premium drops to zero.
Here’s a quick look at other factors that also play a role:
- No demand: Far OTM options often have no buyers near expiry because they’re unlikely to be profitable. With no demand, their price drops to zero.
- Automatic expiration: If an option is OTM at expiry, it isn’t exercised and expires worthless. The buyer loses the premium, and the seller keeps it.
- Practical valuation: Theoretically, an option could retain some value before expiry due to unexpected price movements. However, in reality, if an option is very unlikely to end ITM, its market value often drops to zero anyway.
Brokerage practices can also contribute to this. Some brokers automatically close out positions that are nearly worthless before the market closes. This might make options show a zero value in your account even before the official expiry.
One thing to keep in mind is that options expiring worthless usually don’t attract brokerage fees for the expiration itself. However, you would have already paid fees when you bought or sold the option earlier.
So, when an option premium ends up at 0 on expiry day, it’s mainly because of time decay, lack of intrinsic value, reduced demand, and automatic expiration. These are normal parts of how the options market operates and something every trader should be aware of.