All 3 cases are applicable when you have already bought an option.


1) Squaring off - if you have bought the option then you can very well sell it in the market.. So selling back the option in mkt is Squaring off. It is used by traders how have bought the option to make quick profit and close the position.


2) Exercising - As an option holder, you have the right (for call holder, to buy something or to sell something as put holder). So you can exercise your right and buy /sell the underlying security. In India, option exercise is settled in Cash.. so you will get the credit/debit based on the exercise price of the security and your strike price. Very few people buy option with the purpose to exercise them. Used by option buyer, who want to buy the stock at strike price. Or used by people who wants to sell and close the position but don't find the buyers in the market.


3) Expiry - Options have limited life so one fine day, they are going to expire. If you haven't taken action 1 or action 2 above before the expiry, then they are going to expire. At that time, if the option is in the money, then you will get/pay the money. It is decided by the settlement price on the day of expiry with respect to the strike price. It is sort of forced exercise by Exchange.
Out of the money options are expired worthless so no action is required.
80%+ options expire worthless. Used by people to hedge their positions, used for income generating strategies etc.


Happy Trading.