Option Expiration Mechanics

Option expiration mechanics define the process by which an option contract reaches its end date and is settled. This can occur through physical delivery, where the underlying asset is transferred, or cash settlement, where the difference between the strike price and the market price is paid.

In the crypto space, many protocols utilize automated smart contracts to handle this settlement process without intermediaries. Understanding these mechanics is crucial for traders to avoid unexpected assignment or the loss of value due to slippage during the settlement window.

It involves the interaction between the oracle providing the settlement price and the protocol's execution engine. Traders must be aware of whether their contracts are American style, allowing early exercise, or European style, restricted to expiration.