Transcript: CIBC Investor’s Edge — I sold a call – What happens at expiry?

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[CIBC Investor’s Edge] 

[I sold a call — What happens at expiry?] 

[A mobile phone is shown with a line graph on the screen. The screen scrolls up to show another line graph and a bar graph.]

[A CIBC Investor’s Edge employee stands in front of a wall with the CIBC logo on it and speaks.]

>> CIBC Investor’s Edge employee: We mentioned earlier that on expiry, the contract will either be assigned or expire worthless. But is there another alternative? Let's take a look at three scenarios here. 

The call you wrote is in the money and on expiry you'll be assigned and sell your shares at the strike price.

[A laptop monitor shows a line graph titled: “Scenario 1: the call written is in the money.” The legend explains that blue represents the “Share price.” On the Y axis are dollar amounts, starting at $8.0, then $8.5, $9.0 and $9.5. To the right is a point listed as “Strike price,” which is at the end of a dotted line situated at the $9.0 mark. The area above it is shaded and labelled “in the money.” The graph line which moves upward and ends above the dotted strike price line is labelled at the far point as “stock price at expiry.”]

Number 2, if a stock is in the money, but you do not want to sell your shares, you may close out your option position and sell a new contract with a future expiry.

So here you have an outflow of cash to buy back the option and then you have an inflow from the new contract that you're writing. We call this “rolling out.”

[A new graph is shown that is titled: “Scenario 2: the stock is in the money.” The graph is set up the same as the initial graph. The line graph moves to the left and the stock price at expiry point is renamed to “close option position — sell new contract.” The graph then moves a bit farther. A shaded bar that goes from the top to the bottom of the graph is labelled “future expiry.” The “close option position” is highlighted and labelled “$ outflow.” The highlight then moves to “Sell new contract” and is labelled “$ inflow.”] 

You may also close out the contract and choose not to roll it over if you think there is strong upside potential for the stock. However, you may be paying more to close out that contract that you initially received when you wrote it.

[The same graph is shown with just a closeup of the close option position, and is newly titled: Scenario 2: close contract without rolling out.”]

[A coin icon appears to the right with arrows moving out of it in both directions, labelled “May be paying more to close contract.” To the right a new document and pen is labelled “than initially received.”]

Number 3, what happens if the option expires worthless? Well, then you continue owning the shares and you may choose to write a new contract and start the cycle all over again.

[The same graph set up as the previous graph and is titled “Scenario 3: the option expires worthless.” The graph line, however, has a downward trajectory. The dotted line at $9.0 is labelled as “strike price.” Below this dotted line is a shaded area labelled “out of the money.” The graph line ends below the $8.5 mark and is labelled “stock price at expiry.” The title changes to “Scenario 3: you continue to own the shares,” which then changes to “you may write a new contract.”]

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[CIBC Investor’s Edge is a division of CIBC Investor Services Inc. This document is provided for general informational purposes only and does not constitute investment advice. The information contained in this document has been obtained from sources believed to be reliable and believed to be accurate at the time publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. The CIBC logo is a registered trademark of CIBC. The material and its contents may not be reproduced without the express written consent of CIBC.]

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