Hi Trades, All,
Preamble:

This applies to Options on Futures contracts.
- AND ONLY to BUYING a Put or Call Option NOT Selling(writing) an option.

Specifically Silver (SI) since times etc. mentioned may vary for other products.

Specifically addresses what can happen at Expiration.
- That some may not have really delved into.
[SERIOUS RISK can develop at expiration depending on the situation.]

Many view (and how many times have you read it) that buying an option exposes you to "limited risk" i.e. the price you paid for the option.

That Buying an Option gives you the RIGHT AND NOT THE OBLIGATION to purchase the underlying at Expiration IF the Option expires ITM (In The Money) AND that right to purchase is at the Strike Price of the Option you Purchased.

SO FAR SO GOOD !! And is pretty safe if your option is WELL ITM, not on the edge at expiration.
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Now, what follows resulted from exploring the "maximum damage" concept put forth by Trades. That the price of the underlying will migrate to a price point at expiration that will result in "maximum damage" to the option holders.
- This applies to what happened on 1/26/2011 as the Feb11 Options expired for the SIH11 futures contract.

The max. damage range was suggested to be 27.5 to 28 from the Open Interest on the Puts and Calls. I came up with this range a day or two before (for Fun) when SIH11 was quite a bit lower (look at a chart).

WELL, as Noon approached SIH11 was going up fairly quickly.
- Now some nitpicking detail !!!

JUST WHAT IS EXPIRATION ????

For SI options the ATM (At The Money) settlement price is determined by the exchange at 12:25 pm CT [by averaging the prices of all of the trades in the last minute]. That exact number is not readily available but can be obtained from your broker about 1/2 hour after.
- That number is the final/absolute ATM Price/line for determining which options are ITM or OOM for expiration.
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NOW MORE IMPORTANT NITPICKS !!

If you are only slightly ITM at this point YOU ARE AT RISK.
- You have a DECISION TO MAKE !!
- If you think the underlying will continue to trade in your favor, then you may decide to sit tight and wait for "assignment".

- If you think things may go against you THEN you MUST notify your broker BEFORE 3:30 pm CT that you DO NOT WANT TO EXERCISE THE OPTION.

If you DO NOT opt out exercising the option, FROM THAT POINT FORWARD YOU HAVE TAKEN ON ALL OF THE RISKS OF WHAT HAPPENS WITH THE PRICE OF THE UNDERLYING !!
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Note:
The Options will continue to trade until 4:15 pm CT.
- If you missed the 3:30 deadline you can try to trade out of the option until 4:15. [I have no clue how liquid/reasonable the market may be at this time.]
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At this point, it appears that "You Own It".
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Now, this assumes your account was sufficiently funded to take on the futures contract (and not sure if the absolute number is IM or MM here).

BUTTTTTT, If your strike is close to current market you will likely be assigned at market close at 4:15 CT to maximize your ability to trade out if necessary. Otherwise you may not be assigned until the next day. [Not totally clear on this paragraph.]
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NOW ON THE OTHER SIDE (and may be a big savior) if the market goes against you.???

What happens if your account is NOT sufficiently funded (IM/MM) to take on the futures contract at assignment ???

More work needed here.

If I recall correctly, If you had an Equity option expire ITM and you did not have the funds to cover the shares your broker would sell you out Monday morning and that is historically gives rise to the drop in the price of the underlying on Monday morning open following expiration ???

Anyway, enough for now.

Please comment, don't hold anything back.
If I erred somewhere I will certainly correct it!!

Thanks, Lee