Can one choose to not settle an ITM option at expiry?

[kmiklas]

Is it possible to NOT exercise an in-the-money option at expiry?

Why? this is an IRRATIONAL decision, right? Well for two reasons:

1. In some situations, it makes sense; for example, say, I bought an INTC call at USD50.00 that expire on April 17th. The price has gone up to USD$55, and I thus have the option to exercise for $500. Can I refuse to take this money?

Why would anyone do this? Imagine that my taxable income stands at is USD249,900, and tax law stipulates that income over USD250K is taxable at 40%, while under USD250K is 33%. In this situation:

- Exercise the option: 0.4 * 250,400 = 100,160,. Gross income = 150,240
- DON'T exercise the option: 0.33 * 249,900 = 82,467. Gross income = 167,433

As you can see, in this situation, it pays to NOT exercise the option... and the decision becomes RATIONAL.

2. Sometimes I like to act irrationally. It confuses the models. If I want to burn $100 bills to light my cigars, then that's what I'm going to do.

 

[ironchef]

Is it possible to NOT exercise an in-the-money option at expiry?

Why? this is an IRRATIONAL decision, right? Well for two reasons:

1. In some situations, it makes sense; for example, say, I bought an INTC call at USD50.00 that expire on April 17th. The price has gone up to USD$55, and I thus have the option to exercise for $500. Can I refuse to take this money?

Why would anyone do this? Imagine that my taxable income stands at is USD249,900, and tax law stipulates that income over USD250K is taxable at 40%, while under USD250K is 33%. In this situation:

- Exercise the option: 0.4 * 250,400 = 100,160,. Gross income = 150,240
- DON'T exercise the option: 0.33 * 249,900 = 82,467. Gross income = 167,433

As you can see, in this situation, it pays to NOT exercise the option... and the decision becomes RATIONAL.

2. Sometimes I like to act irrationally. It confuses the models. If I want to burn $100 bills to light my cigars, then that's what I'm going to do.

Do you understand the concept of marginal tax rates?

Besides, your broker will auto-exercise and deposit the money in your account.

 

[deltaf0rce]

Easiest profile I’ve ever blocked In my life

 

[FSU]

To answer your question, yes, you can file a "do not exercise" advice form with your broker and your in the money option will not be exercised.

Does this make sense to do? No it doesn't. Please google the definition of marginal tax rates.

 

[Walshdil]

I've only been trading options for 3 years. Every time I read something option-related and don't understand it, I ask. So please don't be offended by the following: Are you basically outlining the tax benefits from exercising an ITM option vs. collecting the profits made on the contract?

 

[zdreg]

Besides, your broker will auto-exercise and deposit the money in your account.

Are you familiar with the news nowadays about coronavirus and the concept of self quarantine.
You should do the same about furthering answering on ET.
DelatafOrce1 is obviously as clueless as you are.
As to Kimiklas' response it is technically correct but it is an unusual situation and too many detail's about a person's financial situation need to be known.
As to saying it is irrational it also show a lack of knowledge
If the correct answer is not given by tomorrow evening and I am in a good mood I will provide the correct answer. There are some merciful and good hearted people on ET. Maybe all of you will luck out before then.

 

[BlueWaterSailor]

To answer your question, yes, you can file a "do not exercise" advice form with your broker and your in the money option will not be exercised.

I've discussed this with my broker (TradeStation); by their rules, there's no way to file a standing "do not exercise" order. It has to be done for each specific trade that you do not want exercised, and has to be requested before 4:15pm - within 15 minutes of the market closing.

(I was ITM by 0.01, and didn't feel like paying the exercise fee.)

 

[Walshdil]

TD Ameritrade will also not let you file a "do not exercise" form. You have to contact them before close and request DNE on specific contracts.

 

[zdreg]

TD Ameritrade will also not let you file a "do not exercise" form. You have to contact them before close and request DNE on specific contracts.

Again proof they are properly an automated firm.

 

[zoned_post_meridiem]

Is it possible to NOT exercise an in-the-money option at expiry?

Why? this is an IRRATIONAL decision, right? Well for two reasons:

1. In some situations, it makes sense; for example, say, I bought an INTC call at USD50.00 that expire on April 17th. The price has gone up to USD$55, and I thus have the option to exercise for $500. Can I refuse to take this money?

Why would anyone do this? Imagine that my taxable income stands at is USD249,900, and tax law stipulates that income over USD250K is taxable at 40%, while under USD250K is 33%. In this situation:

- Exercise the option: 0.4 * 250,400 = 100,160,. Gross income = 150,240
- DON'T exercise the option: 0.33 * 249,900 = 82,467. Gross income = 167,433

As you can see, in this situation, it pays to NOT exercise the option... and the decision becomes RATIONAL.

2. Sometimes I like to act irrationally. It confuses the models. If I want to burn $100 bills to light my cigars, then that's what I'm going to do.

That's not how this works. That's not how any of this works. Please consult with a tax accountant before making these decisions.

Only dollars you make *over* $249.000 would be taxed at 40%.