What Is an Active Option Contract? Rights, Expiration, and Taxes

An active option contract is a listed options agreement that stays open and enforceable because it has not yet been exercised, closed through an offsetting trade, or reached its expiration date. While it remains active, the buyer holds the right to buy or sell 100 shares of an underlying stock at a fixed price, and the seller carries the matching obligation to complete that transaction if called upon. The Options Clearing Corporation sits between every buyer and every seller in the U.S. listed-options market and guarantees performance on both sides for as long as the contract lives.¹

A contract becomes active the moment a trade clears through the OCC. It stays active until one of three things happens: the holder exercises it, either side enters an offsetting trade to close, or the contract reaches expiration and settles. Until one of those events, both sides carry live financial exposure to the contract’s terms. The contract doesn’t lose active status just because nobody is trading it that day. If it’s sitting in your brokerage account and hasn’t expired or been exercised, it’s active. Sell it to another trader and it stays active under its new owner.

The Fixed Terms Behind Every Active Contract

Every listed option is defined by a handful of standardized terms set at creation. That standardization is what lets contracts change hands between strangers with no negotiation.

Underlying asset: the specific stock or index the contract covers.
Contract size: one standard equity option covers 100 shares.
Strike price: the fixed dollar amount at which the holder can buy (call) or sell (put) those shares. It never changes, whatever the stock does.
Expiration date: the last day the contract exists. After that date, an unexercised contract is worthless.
Exercise style: most equity options are American-style, meaning the holder can exercise any business day before expiration. Index options are typically European-style, exercisable only at expiration.

Before you can trade options at all, your broker must give you the Options Disclosure Document, which explains the characteristics and risks of listed options. The requirement comes from SEC Rule 9b-1 under the Securities Exchange Act of 1934, and brokers cannot approve your account or accept your first order until they’ve delivered it.² The OCC and the exchanges jointly prepare and update the document.³

Rights and Obligations While the Contract Is Active

The active status of a contract creates an asymmetric legal relationship. The buyer has rights. The seller has obligations. That imbalance is the entire architecture of how options work.

What the Buyer Gets

The buyer pays a premium upfront and receives the right to exercise. For a call, that means buying 100 shares at the strike price; for a put, selling 100 shares at the strike price. The buyer is never required to exercise. If the market moves the wrong way, the buyer can let the contract expire or sell it to someone else. The most a buyer can lose is the premium paid.

What the Seller Owes

The seller collects the premium but takes on the obligation to perform if the buyer exercises. A call writer must deliver 100 shares at the strike price. A put writer must buy 100 shares at the strike price. With American-style options, the buyer can exercise on any business day before expiration, and the seller has no say in when.

The premium is the seller’s to keep whatever happens next. But the potential downside can be significant, especially for uncovered (naked) positions where the seller doesn’t already own the underlying shares. Write a naked call and the stock doubles, and you’re still on the hook to deliver those shares at the original strike.

How Assignment Works

When a buyer exercises, the OCC randomly selects a clearing firm that carries short positions in that same series. The clearing firm then assigns the exercise notice to one of its customers holding that short position, either randomly or through another procedure the firm has established.⁴ You don’t choose whether you’re selected. That’s where the obligation in options writing becomes real.

Once assigned, the writer must deliver. For a short call, that means selling shares at the strike. For a short put, buying shares at the strike. If you don’t have the shares or the cash, your broker will typically force-liquidate other positions in the account to cover, or issue a margin call. The consequences of assignment are financial rather than a regulatory fine, but they can be severe if you’re undercapitalized or the stock has moved sharply against your position.

Equity option trades, including exercises and assignments, settle on a T+1 basis, meaning the shares and cash must change hands by the next business day.⁵

The Three Ways an Active Contract Ends

Every active contract eventually resolves through one of three paths, and the difference matters for both strategy and taxes.

Exercise: the holder triggers the contract and the underlying stock transaction happens at the strike price. For American-style equity options, the holder can submit exercise instructions on any business day up to and including expiration. The deadline is 5:30 p.m. Eastern Time.⁶
Closing trade: either side enters an offsetting transaction. A buyer who originally bought to open can sell to close; a writer who sold to open can buy to close. Once the closing trade fills, you have no further exposure.
Expiration: the contract reaches its expiration date. If it’s out of the money, it expires worthless. If it’s in the money, automatic exercise applies.

Automatic Exercise at Expiration

The OCC uses a process called exercise by exception to automatically exercise expiring options that finish in the money by at least $0.01 per share for both customer and firm accounts. The determination is based on the closing price of the underlying stock on expiration day. Your brokerage firm may apply a different threshold, so check with your broker if you’re holding contracts into expiration and want to avoid an unexpected stock position appearing in your account over the weekend.

If you’re holding an in-the-money option and don’t want it exercised, you must submit a “do not exercise” instruction before the 5:30 p.m. Eastern Time cutoff.⁶ Miss that deadline and the OCC will exercise it automatically, leaving you with shares you may not have wanted or been able to afford.

Margin Requirements While a Written Contract Stays Active

Because writers carry open obligations for as long as a contract stays active, brokers require them to post margin as collateral against performance. FINRA Rule 4210 sets the baseline, and individual brokers often demand more.

For an uncovered short option, the minimum maintenance margin is generally the greater of 20% of the underlying stock’s current market value or the option’s intrinsic value plus an additional percentage of the underlying’s value. Covered positions, where the writer already holds the underlying shares (as in a covered call), carry lower margin requirements because the risk of failure to deliver is much smaller.

Margin isn’t set once and forgotten. It’s recalculated daily based on the stock’s closing price. If the stock moves sharply against your position, your broker can issue a margin call requiring immediate additional cash or securities. Failing to meet a margin call typically results in the broker liquidating your position at whatever price the market offers, which is often the worst possible moment to sell.

Tax Treatment Tied to How the Active Contract Resolves

How the IRS taxes your options depends on what type of option you traded and how the contract ended. The rules differ between standard equity options and broad-based index options.

Standard Equity Options

Options on individual stocks are not Section 1256 contracts and do not receive the 60/40 tax split.⁷ Gains and losses instead follow ordinary capital gains rules based on how long you held the position and how the contract resolved:⁸

Sold before expiration: the difference between your purchase and sale price is a capital gain or loss. Short-term if held a year or less, long-term if more.
Expired worthless (buyer): a capital loss equal to the premium paid. Usually short-term because most options run under a year.
Expired worthless (writer): the premium collected is a short-term capital gain.
Exercised call (buyer): no gain or loss at exercise. The premium paid is added to the cost basis of the shares purchased.
Exercised put (buyer): the premium paid reduces the amount realized on the sale of the underlying shares. Whether the resulting gain or loss is short- or long-term depends on how long you held the stock, not the option.

Index Options

Nonequity options, including options on broad-based indexes like the S&P 500, qualify as Section 1256 contracts. Regardless of holding period, 60% of any gain or loss is treated as long-term and 40% as short-term.⁷ These contracts are also marked to market at year-end, meaning you owe tax on unrealized gains in open positions as of December 31, even if you haven’t closed the trade.

One more tax trap to watch: if you sell an option at a loss and buy a substantially identical option within 30 days before or after that sale, the IRS disallows the loss under the wash sale rule. The disallowed loss gets added to the cost basis of the replacement position, deferring rather than erasing the deduction.⁹

Who Stands Behind an Active Contract

Options regulation runs in layers. The SEC sets the overarching rules under the Securities Exchange Act of 1934, including the disclosure requirements that protect retail investors.¹⁰ The OCC acts as the central counterparty, the buyer to every seller and the seller to every buyer, guaranteeing that every contract is honored.¹ FINRA oversees the broker-dealers who execute trades and enforces margin and suitability rules at the firm level. The individual exchanges (Cboe, NYSE Arca, Nasdaq) set their own trading rules within the SEC’s framework.

For a retail trader, the most important practical protection is suitability: your broker must evaluate whether options trading is appropriate for your financial situation before approving your account, and must deliver the Options Disclosure Document before your first trade.¹¹ Read it before you buy or write your first contract, because once the trade clears and the contract is active, the rights and obligations described above are yours until it ends.

1
The Options Clearing Corporation. OCC – The Foundation for Secure Markets
2
eCFR. 17 CFR 240.9b-1 – Options Disclosure Document
3
U.S. Securities and Exchange Commission. Options Disclosure Document
4
FINRA. Trading Options: Understanding Assignment
5
FINRA. a href=”https://www.finra.org/investors/insights/understanding-settlement-cycles” target=”_blank” rel=”noopener”>Understanding Settlement Cycles: What Does T+1 Mean for You
6
U.S. Securities and Exchange Commission. Rule 1100 – Exercise of Options Contracts
7
Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market
8
Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses
9
Investor.gov (U.S. Securities and Exchange Commission). Wash Sales
10
U.S. Securities and Exchange Commission. Statutes and Regulations
11
The Options Clearing Corporation. Characteristics and Risks of Standardized Options