What Happens On A Bought Call In The Money At Expiration – The Real Truth

None of them did. Libya lost every dollar that was invested. In a suit filed against Goldman in London, the Libyan Investment Authority said that Goldman made at least $350 million from putting the country’s sovereign wealth funds into investments that the investment banking firm didn’t explain and that Libya didn’t understand.

Options can also be rolled down or rolled up. Rolling down occurs when an investor with a covered call decides to close out the current call and write another call with a lower strike price. Conversely, when the cost of the underlying stock shares rises above the strike price of a covered call, then the investor is confronted with two primary choices. One is to allow the stock shares be called away. The other choice is to close out their original covered call and write another covered call at a higher strike price. This writing of another at a higher strike price is referred to as rolling up.

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Had the Libyans understood them, they’d have known that the fund was effectively buying long-term call options on the six stocks. They could expire worthless if the shares failed to gain over the period, as with all options. On the other hand, if the stocks rose substantially, the Libyan fund could have profited.

The investments generally involved both a forward contract and a put option. Economically, the suit says, they amounted to long-term call options on the shares, giving the fund’s right to profit if the shares rose, but limiting its possible losses to the amount invested. Part of the Électricité de France investment had an additional amount that would have limited Libya’s profit if the stock rose by more than 40 percent before the contracts expired in early 2011.

The Citigroup transactions were the first entered into in January 2008. There were two transactions, with similar terms, and they’re combined in this analysis.

Essentially, the Libyan fund had options to buy 22.3 million Citigroup shares, then worth $5.7 Billion. But it would profit that, if the value of those shares rose to at least $5.9 billion by early 2011, since it paid $200 million up front to develop the investment. If the value was lower than $5.7 billion when the options expired, Libya would get nothing and lose the entire initial investment.

There was a sweetener. The exercise price of the option could be reduced by up to 10 percent if Citigroup shares fell over the following nine months. That did happen, but that meant only that Libya’s investment would have value if the shares wound up being worth at least $5.1 Billion.

All the other investments mentioned in the suit also expired worthless, although neither of them appear to have expired as far out of the money as did the Citigroup transaction. While many stocks did badly during the three years, financial stocks, the ones in which about 75 percent of the fund’s money was invested, performed particularly badly.

Had the Libyan fund bought the shares instead of options, it would have lost money but not nearly all of its investment.

By the Libyan fund’s account, Goldman didn’t explain the disputed transactions until well after they were made, and didn’t provide confirmations of the trades until weeks, or in some instances months, after they were made. It says Goldman didn’t require it to sign the normal agreement required to trade in derivatives.

The suit adds that, because the value of the investments deteriorated,’ Goldman had to be chased on several occasions before it provided the L.I.A. with account statements ” regarding the trades.

FAQ’s: Call options question….?
What happens if you bought calls and they end up in the money at expiration but you did not sell them before that day of exp. Would you end up with the shares automatically? Or do you need to act.

  • If you have unexercised calls (or puts for that matter) that are ITM (in the money) at expiration, they expire worthless. You have to tell your brokerage to exercise them. On the other hand if you WRITE puts or calls, they well generally be automatically assigned (executed) if they are ITM at expiration.

  • Yes, you need to take action. The security after all is called an "option" – not an "automatic."