Why would someone want to buy an option on the day of expiry
The short answer to your initial question is: yes. The option doesn't expire until the close of the market on the day of expiration. Because the option is expiring so soon, the time value of the option is quite small.  That is why the option, once it is 'in-the-money', will track so closely to the underlying stock price. If someone buys an in-the-money option on the day of expiration, they are likely still expecting the price to go up before they sell it or exercise it. Many brokers will exercise your in-the-money options sometime after 3pm on the day of expiration.  If this is not what you desire, you should communicate that with them prior to that day. Market makers are required to buy options contracts as a condition of being a market maker.  It is what keeps the markets functioning and liquid. As to whether or not your trade can be closed at a profit depends on many variables - how much you paid, what the underlying security is, etc CBOE Options expiration FAQs Yes there will be enough liquidity to sell your position barring some sort of Flash Crash anomaly. Volume generally rises on the day of expiration to increase this liquidity. Don't forget that there are many investment strategies--buying to cover a short position is closing out a trade similar to your case.
One way is to compare the implied volatility with the realised volatility over a period similar to the time left to expiry. However there are plenty of reasons why the implied may be higher than the historical, for example because the market volatility has increased overall or because the underlying company is going to report their results before the option expires. 1 reason is  Leverage.... If you are buying out of the money options you get much more bang for your buck if the stock moves in your favor.  The flipside is it is much more likely that you would lose all of your investment. "Not all call options that have value at expiration, exercise by purchasing the security (or attempting to, with funds in your account).   On ETNs, they often (always?) settle in cash.  As an example of an option I'm currently looking at, AVSPY, it settles in cash (please confirm by reading the documentation on this set of options at http://www.nasdaqomxtrader.com/Micro.aspx?id=Alpha, but it is an example of this).  There's nothing it can settle into (as you can't purchase the AVSPY index, only options on it).  You may quickly look (wikipedia) at the difference between ""American Style"" options and ""European Style"" options, for more understanding here. Interestingly I just spoke to my broker about this subject for a trade execution.  Before I go into that, let me also quickly refer to Joe's answer:  what you buy, you can sell.  That's one of the jobs of a market maker, to provide liquidity in a market.  So, when you buy a stock, you can sell it.  When you buy an option, you can sell it.  That's at any time before expiration (although how close you do it before the closing bell on expiration Friday/Saturday is your discretion).  When a market maker lists an option price, they list a bid and an ask.  If you are willing to sell at the bid price, they need to purchase it (generally speaking).  That's why they put a spread between the bid and ask price, but that's another topic not related to your question -- just note the point of them buying at the bid price, and selling at the ask price -- that's what they're saying they'll do. Now, one major difference with options vs. stocks is that options are contracts. So, therefore, we can note just as easily that YOU can sell the option on something (particularly if you own either the underlying, or an option deeper in the money).  If you own the underlying instrument/stock, and you sell a CALL option on it, this is a strategy typically referred to as a covered call, considered a ""risk reduction"" strategy.  You forfeit (potential) gains on the upside, for money you receive in selling the option. The point of this discussion is, is simply: what one buys one can sell;  what one sells one can buy -- that's how a ""market"" is supposed to work.  And also, not to think that making money in options is buying first, then selling.  It may be selling, and either buying back or ideally that option expiring worthless. -- Now, a final example.  Let's say you buy a deep in the money call on a stock trading at $150, and you own the $100 calls.  At expiration, these have a value of $50.  But let's say, you don't have any money in your account, to take ownership of the underlying security (you have to come up with the additional $100 per share you are missing).  In that case, need to call  your broker and see how they handle it, and it will depend on the type of account you have (e.g. margin or not, IRA, etc).  Generally speaking though, the ""margin department"" makes these decisions, and they look through folks that have options on things that have value, and are expiring, and whether they have the funds in their account to absorb the security they are going to need to own.  Exchange-wise, options that have value at expiration, are exercised.  But what if the person who has the option, doesn't have the funds to own the whole stock? Well, ideally on Monday they'll buy all the shares with the options you have at the current price, and immediately liquidate the amount you can't afford to own, but they don't have to.  I'm mentioning this detail so that it helps you see what's going or needs to go on with exchanges and brokerages and individuals, so you have a broader picture." I think it depends on your broker. Some brokers will not try to auto exercise in the money options. Others will try to do the exercise it if you have available funds. Your best bet, if find yourself in that situation, is to sell the option on the open market the day of or slightly before expiration. Put it on your calendar and don't forget, you could loose your profits. @#2 Its in the best interest of your broker to exercise because they get a commission. I think they are used to this situation where there is a lack of funds. Its not like bouncing a check. You will need to check with your broker on this. @#3 I think many or most options traders never intend on buying the underling stock. Therefore no, they do not always make sure there is enough funds to buy. It depends on the broker, each one's rules may vary. Your broker should be able to answer this question for how they handle such a situation. The broker I used would execute and immediately sell the stock if the option was 25 cents in the money at expiration. If they simply executed and news broke over the weekend (option expiration is always on Friday), the client could wake up Monday to a bad margin call, or worse. "If you buy a call, that's because you expect that the stock will go up. If it does not go up, then forget about buying more calls as your initial idea seems to be wrong. And I don't think that buying a put to make up for the loss will work either, the only thing that is sure is that you will pay another premium (on a stock that could stay where it is). Even if you are 100% sure that the stock will go up again, don't do anything, as John Maynard Keynes stated: ""Markets can remain irrational longer than you can remain solvent"". My idea is: wait until the expiration date. The good things about options is that you won't lose more than the premium that you paid for it and that until it reaches its maturity you can still make money if the market turns around. More generally, when you are purely speculating, adding to a position when it goes against you is called ""averaging down"". I sincerely discourage you to do that : If the stocks goes in the wrong direction, that means that your   initial idea was wrong in the first place (or you were not right at   the right moment). In my opinion, adding up to a wrong idea is not the   right thing to do. When you are losing, just take your loss and don't   add up to your position based on your emotions. On the other hand, adding to your position more when the stock goes in   your direction is called ""pyramiding"" and is, in my opinion, a better   way of doing things (you bought, you were right, let's buy more). But   at some point you will have to take your profits. There are plenty of other stocks on which you can try to invest and the market will still be here tomorrow, there will be other opportunities to make profits. Rushing things by constantly trying to have a position is not a good idea. Not doing anything is also a strategy." "Consider the futures market. Traders buy and sell gold futures, but very few contracts, relatively speaking, result in delivery. The contracts are sold, and ""Open interest"" dwindles to near zero most months as the final date approaches. The seller buys back his short position, the buyer sells off his longs.  When I own a call, and am 'winning,' say the option that cost me $1 is now worth $2, I'd rather sell that option for even $1.95 than to buy 100 shares of a $148 stock. The punchline is that very few option buyers actually hope to own the stock in the end. Just like the futures, open interest falls as expiration approaches." "Great answer by @duffbeer. Only thing to add is that the option itself becomes a tradeable asset. Here's my go at filling out the answer from @duffbeer. ""Hey kid... So you have this brand-new video game Manic Mazes that you paid $50 for on Jan 1st that you want to sell two months from now"" ""Yes, Mr. Video Game Broker, but I want to lock in a price so I know how much to save for a new Tickle Me Elmo for my baby sister."" ""Ok, for $3, I'll sell you a 'Put' option so you can sell the game to me for $40 in two months."" Kid says ""Ok!"", sends $3 to Mr Game Broker who sends our kid a piece of paper saying: The holder of this piece of paper can sell the game Manic Mazes to Mr Game Broker for $40 on March 1st. .... One month later .... News comes out that Manic Mazes is full of bugs, and the price in the shops is heavily discounted to $30. Mr Options Trader realizes that our kid holds a contract written by Mr Game Broker which effectively allows our kid to sell the game at $10 over the price of the new game, so maybe about $15 over the price in the second-hand market (which he reckons might be about $25 on March 1st). He calls up our kid. ""Hey kid, you know that Put option that Mr Game Broker sold to you you a month ago, wanna sell it to me for $13?"" (He wants to get it a couple of bucks cheaper than his $15 fair valuation.) Kid thinks:  hmmm ... that would be a $10 net profit for me on that Put Option, but I wouldn't be able to sell the game for $40 next month, I'd likely only get something like $25 for it. So I would kind-of be getting $10 now rather than potentially getting $12 in a month. Note: The $12 is because there could be $15 from exercising the put option (selling for $40 a game worth only $25 in the second-hand market) minus the original cost of $3 for the Put option. Kid likes the idea and replies: ""Done!"". Next day kid sends the Put option contract to Mr Options Trader and receives $13 in return. Our kid bought the Put option and later sold it for a profit, and all of this happened before the option reached its expiry date." I would expect that your position will be liquidated when the option expires, but not before. There's probably still some time value so it doesn't make sense for the buyer to exercise the option early and take your stock. Instead they could sell the option to someone else and collect the remaining time value. Occasionally there's a weird situation for whatever reason, where an option has near-zero or negative time value, and then you might get an early exercise. But in general if there's time value someone would want to sell rather than exercise. If the option hasn't expired, maybe the stock will even fall again and you'll keep it. If the option just expired, maybe the exercise just hasn't been processed yet, it may take overnight or so. "people are willing to pay higher premiums for options when stocks go down. Obviously the time value and intrinsic value and interests rates of the option doesn't change because of this so the miscalculation remainder is priced into the implied volatility part of the formula.  Basically, anything that suggests the stock price will get volatile (sharp moves in either direction) will increase the implied volatility of the option. For instance, around earnings reports, the IV in both calls and puts in the nearest expiration dates are very high. When stocks go down sharply, the volatility is high because some people are buying puts for protection and others are buying calls because they think there will be a rebound move in the other direction. People (the ""sleep-at-night"" investors, not the derivatives traders ;) )  tend to be calm when stocks are going up, and fearful when they are going down. The psychology is important to understand and observe and profit from, not to quantitatively prove. The first paragraph should be your qualitative answer" In the equity world, if a stock trades at 110 and is going to pay a dividend of 10 in a few days, an option expiring after the ex date would take the dividend into account and would trade as if the stock were trading at 100. (Negative) interest rates may also lead to a similar effect. In the commodity world the cost of carry needs to be taken into account. "An option is a financial instrument instrument that gives you the right, but not the obligation, to do some transaction in the future at a given price. An employee stock option is a kind of ""call option"" -- it gives you the right, but not the obligation, to buy the stock at a certain price (the ""exercise price"", usually set as the price of the stock when the option was granted). The idea is that you would ""exercise"" the option (buy the stock at the given price as provided by the option), if the value of the stock is higher than the exercise price, and not if it is lower. The option is gifted to you. But that does not mean you get any stock. If and when you choose to exercise the option, you would buy the stock with your own money. At what time you can exercise the option (and how many shares you can exercise at a given time) will be specified in the agreement. Usually, you can only exercise a particular share after it has ""vested"" (according to some vesting schedule), and you lose the ability to exercise after you no longer work for the company (plus perhaps a grace period), or after the option expires." In the money puts and calls are subject to automatic execution at expiration. Each broker has its own rules and process for this.  For example, I am long a put. The strike is $100. The stock trades at the close, that final friday for $90. I am out to lunch that day. Figuratively, of course. I wake up Saturday and am short 100 shares. I can only be short in a margin account. And similarly, if I own calls, I either need the full value of the stock (i.e. 100*strike price) or a margin account.  I am going to repeat the key point. Each broker has its own process for auto execution. But, yes, you really don't want a deep in the money option to expire with no transaction.  On the flip side, you don't want to wake up Monday to find they were bought out by Apple for $150. Today SPY (The S&P ETF) trades at $128. The option to buy at $140 (this is a Jan '13 call) trades for $5.  I buy the call, for $500 as they trade in 100 lots.  The S&P skyrockets to 1500 and SPY to $150. The call trades for $11, as it still has a month or two before expiring, so I sell it, and get $1100. The S&P rose 17%, but I doubled my money. If it 'only' rose 9%, to less than $140, I'd lose my investment. No, I don't need to buy the SPY I can sell the call any time before expiration. In fact, most options are not exercised, they are sold between purchase and expiration date. The other answer covers the mechanics of how to buy/sell a future contract. You seem however to be under the impression that you can buy the contract at 1,581.90 today and sell at 1,588.85 on expiry date if the index does not move. This is true but there are two important caveats: In other words, it is not the case that your chance of making money by buying that contract is more than 50%...