What is options exercise process

[traderwald]

Hi guys,

I have a few questions about options exercise process:

1. I want to understand how to exercise American options - is it simply clicking a button that says exercise when an option we purchased is ITM ? Or do we need to call and inform to exercise the option ?

2. I read that in futures options trading, the brpker exercises when the options is even one cent ITM.

a. Is it true ?
b. Does it apply to both long and short options ?

3. If a covered call option is exercised, then the covering long underlying position is closed - is that correct ? Or is there any further action on that ?

4. When I ask about options exercise to brpkers, they are usually a bit concerned about it . Is there any reason for this ? In general is options exercise an ok thing to do ?

Thank you

 

[Amahrix]

Hi,

1. Depends on your broker and the platform you're using. Nowadays, it is the click of a button, you can also call and inform if you'd like.

2. Yes, it is auto-exercised if it is in the money 'at expiration'. (Some brokers sell the position if you do not have the funds to cover in the account).

2a. Yes, generally it is true. You can set preferences with some brokers tho.
2b. Yes.

3. Yes, generally all is done automatically these days.

4. Possibly want to make sure you have the funds to cover once exercised. Options are leveraged products, end of the day. Another reason could be because usually options get sold back into market, or expire worthless, and maybe they don't deal with too many requests. But most likely, I believe it is because they want to make sure you have the funds to cover the exercise.

This is all under the assumption you're using a reputable, well-established broker (TD Ameritrade, Tastywork, Interactive Brokers, Schwab, etc).

Anyone else can add/correct me.

 

[traderwald]

Hi,


2. Yes, it is auto-exercised if it is in the money 'at expiration'. (Some brokers sell the position if you do not have the funds to cover in the account).

2a. Yes, generally it is true. You can set preferences with some brokers tho.
2b. Yes.

Thank you for the reply Amahrix.

On this question: Just want to check - does it get auto-exercised if it is before the exoiration datte and it is a Futures option and is ITM

Thank you

 

[Amahrix]

Thank you for the reply Amahrix.

On this question: Just want to check - does it get auto-exercised if it is before the exoiration datte and it is a Futures option and is ITM

Thank you

I generally deal in equity options but let me elaborate further for you.

An option buyer has the right (but not the obligation) to exercise anytime up until the contract expires.

An option seller has to satisfy delivery if he is 'called'.

If a buyer of an options contract has his option In-The-Money at anytime during the period up until expiration, they can choose to liquidate(sell the option back into the market), exercise (they'll have to have cash to satisfy this exercise and seller will have to deliver), or continue holding(in hopes of going even more In-The-Money, or for whatever reason).

It does not get auto-exercised before expiration and while it is in-the-money by the broker. Nevertheless, at expiration, once the option expires and if it is in-the-money, the broker auto-exercises at this point, or sells on your behalf if they deem that you will not have sufficient capital to satisfy the subsequent margin requirements (unless you have the cash already in the account).

Again, anytime during the life of the option, if it goes in-the-money, you(as the buyer) have the right but not obligation to exercise, among other options. It doesn't get automatically exercised during this period but as you approach expiration closer and closer, a decision will have to be made, otherwise the broker will decide what to do.

I hope that makes sense.

Also check; https://uploads.tradestation.com/uploads/Exercise-assignment.pdf

What is it that you're up to?

Disclaimer: Verify everything I said for yourself.