Exercising Options

What is “automatic exercise” of an option?
The Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration, a procedure also referred to as “exercise by exception.” Generally, OCC will automatically exercise any expiring equity call or put in a customer account that is $0.05 or more in-the-money, and an index option that is $.01 or more in-the-money. However, a specific brokerage firm’s threshold for such automatic exercise may or may not be the same as OCC’s.

When and how is an equity option exercised?
An investor with a long equity call or put position may exercise that contract at any time before the contract expires, up to and including the Friday before its expiration. To do so, the investor must notify his brokerage firm of intent to exercise in a manner, and by the deadline specified by that particular firm.

Must you exercise an expiring in-the-money equity option?
An investor with an expiring long equity call or put position that is subject to automatic exercise does not have to exercise the contract. Instructions may be given through a brokerage firm to OCC not to exercise a call or put that is in-the-money by any amount.

What happens to my long option if I never sell or exercise it?
After its expiration date a call or put will cease to exist. If you own an option and it expires unexercised, you no longer have any of the rights inherent in that contract and you lose the premium you paid for it, plus any commissions and fees you incurred at its purchase. You are free to close out a long call or put before expiration by selling it if it has market value.