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Equity option

An option on an individual stock; American style, physically settled into 100 shares, and exposed to dividend and early-assignment risk.

Equity options are the default contract most retail traders meet first. They are american-style-options, so the holder can exercise any day up to expiration-date, and they settle in shares rather than cash.

That combination creates the practical risks that index traders never see: early-assignment around an ex-dividend date, pin-risk at expiration, and an unwanted 100-share position on Monday morning if you forget to close a short leg.

Example: you are short one XYZ $50 put and XYZ closes expiration at $49.80. Under exercise-by-exception you are assigned 100 shares at $50, paying $5,000 for stock worth $4,980. The trade is fine if you wanted the shares, and a problem if your account had $1,000 in it.

Related: index-option, american-style-option, early-assignment, physically-settled-option

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How an option's time value decaysA curve sliding gently downward at first and then dropping steeply into expiry, where it reaches zero.Extrinsic (time) value6420906030Value bleeds away slowly at firstDecay speeds up hereWorth nothing at expiryexpiryDays to expiry
Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.

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