Nov 9, 2010
If you sell a non-standard put option spread: For instance, I sold the Nov 20 $7.50 strike price put option and bought the Nov 20 $5.00 strike and collected the premium.
My question is do non-standard options expire like standard options? How will I be able to keep the premium I collected? And the stock is above the $7.50 strike; its at $13
Yes, expiration is identical whether the option is standard or non-standard. The difference between these options occurs when an option is exercised. If there is no exercise, then there is no difference. When there is an exercise, the difference is in the 'deliverable.' In other words, if you are assigned an exercise notice on a non-standard put, you must still pay the strike price per share, however, you will not receive 100 shares of stock in return for that cash payment. You get something different.
What you get is 'the identical package that the owner of 100 shares of stock received when the merger, split, spin-off, or other corporate action' received when the corporate action was announced. In other words, if there was a merger and the owner of 100 shares of the company whose put option you sold received 87 shares of the new company plus $0.12 in cash per share, plus 2 shares in a new company, then you, as the put seller would be obligated to pay $750 (100 x the 7.50 strike price) and you would get 87 shares, $12, and 2 shares.
First, you already collected the cash premium and it is in your account. Thus, 'keeping' it is not a problem for you.
Next, when the options expire out of the money, they cease to exist. Your obligation to buy shares at $7.50 is canceled. Thus, the cash premium can never be taken away.
If the stock is truly out of the money [be careful: every once in awhile the strike price of the option has been adjusted and it becomes difficult to determine whether an option is in the money (but this is rare)], as yours appears to be, there is nothing to do. When expiration arrives next week, you are free and clear. The cash remains yours, there is nothing you have to do, and you are under no further obligations. That's exactly the same as with a standard option.
Mark D Wolfinger