Long options and avoiding excercise...

optionsgirl · Feb 2, 2011

I'd like to revisit this topic. I remember reading here about an option owner being forced to exercise his long options. On expiration day, he tried to sell but there were no bids. Then the options went into the money after the closing bell.

Original thread:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=51251

After rummaging through Google, I discovered that you can opt out of exercising your long options by notifying the broker. Is this true?

I've been thinking about playing expiration Friday, but I would like to know if I can actually opt out of exercising. If I can't, then this means I would not be able to leverage very much since I have to reserve cash for the exercise amount.

What happened to the right to exercise, but NOT the obligation to exercise that I keep reading about?

MTE · Feb 2, 2011

Any option that is more than 0.01 ITM at expiration will be automatically exercised. If you don't want it to be exercised then you need to notify your broker prior to the cut off time.

SWScapital · Feb 2, 2011

Quote from optionsgirl:

After rummaging through Google, I discovered that you can opt out of exercising your long options by notifying the broker. Is this true?

100% true.

nazzdack · Feb 2, 2011

Quote from optionsgirl:
----I discovered that you can....

You should have known about automatic exercise from reading the risk disclosure information that should have been a part of your account documents, not from a google-search. :eek:

Martinghoul · Feb 2, 2011

Exercising suboptimally is rarely justified (hence the suboptimal bit). It's natural that you need to explicitly instruct your broker to exercise the way you want, if this way is "unusual".

KINGOFSHORTS · Feb 2, 2011

What the OCC should do is remove auto exercise. If you are too stupid to exercise or close a profitable long call you deserve to lose your profit.

Let the user elect to auto exercise a long option by having to click a checkmark on the position to enable automatic exercise.

tomk96 · Feb 4, 2011

Quote from KINGOFSHORTS:

What the OCC should do is remove auto exercise. If you are too stupid to exercise or close a profitable long call you deserve to lose your profit.

Let the user elect to auto exercise a long option by having to click a checkmark on the position to enable automatic exercise.

why would they do that and make the entire industry less efficient? if i had to submit an exercise form and list every option i want exercised i'd go crazy after 2 months.

it's rare to use a do not exercise notice or exercise by exception notice unless you got pinned or aren't sure of the official settle price.

donnap · Feb 5, 2011

Quote from tomk96:

why would they do that and make the entire industry less efficient? if i had to submit an exercise form and list every option i want exercised i'd go crazy after 2 months.

it's rare to use a do not exercise notice or exercise by exception notice unless you got pinned or aren't sure of the official settle price.

Yes. Much better now. Back in the day of auto-exercise threshholds of .75? I'd often have to send in contra instructions for long options that were ITM less than the threshhold.

Occasionally, back then, you'd have a short ITM that wasn't exercised. Usually a bonus, but made risk management less predictable.

But, generally, any option that was .01 or more ITM was exercised anyways - so having it auto is more efficient.

optionsgirl · Feb 6, 2011

Well, I just wished that my broker made it more "efficient" to not exercise an option. On my broker's web platform, I see no way to opt out of auto exercise. I assume I would have to call them to opt out.

I also wonder if you have a long put, then the stock goes bankrupt and gets delisted on the exchange, wouldn't this create an exercise issue as well?

What happens to deep in the money LEAP options that gets delisted when there is only a month left to expiration? Can you sell them or is your only choice is to exercise them?

tomk96 · Feb 6, 2011

Quote from optionsgirl:

Well, I just wished that my broker made it more "efficient" to not exercise an option. On my broker's web platform, I see no way to opt out of auto exercise. I assume I would have to call them to opt out.

I also wonder if you have a long put, then the stock goes bankrupt and gets delisted on the exchange, wouldn't this create an exercise issue as well?

What happens to deep in the money LEAP options that gets delisted when there is only a month left to expiration? Can you sell them or is your only choice is to exercise them?

i can't comment about your broker.

fyi, LEAPs that are 1 month away, are no long LEAPs. LEAPs are over 1year. Options with open interest don't get delisted.

you can always sell a long option. i think the issue happens when you don't pay attention when you are near the strike heading into the close.