A notice to Noobs regarding Expiration friday.

Discussion in 'Options' started by KINGOFSHORTS, Jul 16, 2009.

  1. IF you are long call options, even if they are out of the money on friday. Make sure you call your broker and instruct them not to exercise IF YOU DO NOT WANT any EQUITY delivered to your account.

    There is no fee for such a service and even if a option is out of the money there is always a possibility that something could happen and your long option position might end up be 1 penny in the money which is enough for automatic exercise and you will get equity delivered to your account.
  2. erol


    what triggered this message?
  3. Last month we had a pretty funny event happen. It was a salvageable situation but lessons learned for the individual.

    When you get a call saying "Hey I need you to help me get out of this"

    You know something bad happened.
  4. erol


    ohhh i see, that's funny.

    you know, that's one of the things missing from options literature...

    I read an entire (beginners) book, and I didn't know I could buy back a short position.

    I also didn't understand how the clearing corporation worked, automatic exercise etc.

    I pieced it together from other sources, and from what I read here too (clearing corporations, and other things around assignment)

    too much information about P/L on expiration, not enough about managing positions, repairing positions, mechanics of options (who is taking other side), how you're selected for assignment etc.
  5. how can ones broker exercise an option on you when it is out of the money..don't make sense...hmmm
  6. Because it might not end up out of the money. And the automatic exercise threshold is 1 penny.

    So you either close out your position or provide explicit instructions on what you want.



    "Exercise by exception" is an administrative procedure used by The Options Clearing Corporation ("OCC") to expedite the exercise of expiring options by Clearing Members. In this procedure options which are in-the-money by specified threshold amounts are exercised unless the Clearing Member submits instructions not to exercise these options. "Exercise by exception" is a procedural convenience extended to OCC Clearing Members, which relieves them of the operational burden of entering individual exercise instructions for every option contract to be exercised. It is important to note "exercise by exception"is a procedure between OCC and its Clearing Members and is not intended to obviate the need for customers to communicate exercise instructions to their brokers:

    "The exercise thresholds provided for in Rule 805(d) and elsewhere in the rules are part of the administrative procedures established by the Corporation to expedite its processing of exercises of expiring options by Clearing Members, and are not intended to dictate to Clearing Members which positions in customers’ accounts should or must be exercised." (Rule 805, Interpretation .02)


    Expiring options subject to exercise by exception use the following thresholds to trigger exercise:

    Equity options: $.01 per contract in-the-money in the customer account; .01 per contract in-the-money in firm and market maker accounts. Index options: $.01 per contract in-the-money in all account types.

    Expiring options are determined to be in-the-money or not based on the difference between the exercise price and the “closing price” of the underlying security.

    The "exercise by exception" procedure for expiring options described above is sometimes incorrectly referred to as "automatic exercise." It is important to note "exercise by exception" always allows an OCC Clearing Member to effect a choice not to exercise an option that is in the money by the exercise threshold amount or more, or to exercise an option which has not reached the exercise threshold amount. The exercise threshold amounts used in "exercise by exception" trigger "automatic" exercise only in the absence of contrary instructions from the Clearing Member. Because the right of choice is always involved in "exercise by exception," exercise under these procedures is not, strictly speaking, "automatic."

  7. ellevers


    I will give you a example that happen to me a couple of years ago. I was long some google calls on friday expiration that were trading just below the strike. For example reasons lets say the strike was 450 and the stock was trading 449.25 to 449.80 in the last ten minutes of the day. I bought a 50 lot at a nickle hoping there might be a pop right at the last minute of trading or even after the close(GS lets you exercise or not exercise up to 4:30 cst) and be able to sell stock above 450 for a profit. goog never traded all day and even after the close above 450 but when i came in on monday i was long 5000 shares. GS is my broker and I called them and asked them how this was possible for an automatic exercise since it never traded above 450. Did a little research and nasdaq the primary in the stock put the closing print at 450.20. The automatic exercise is based off the closing print in the stock not where the bid ask or last is at 4:00pm est. Ever since then I always wait for the closing print in the primary market of the stock before assuming that the option will go out worthless. Sometimes the closing prints in the NYSE stocks doesn't come out for 10 to 20 minutes after the close.

  8. 1) He was referring to situations in which you OWN the option. Not when you are short the option.

    2) When you are short the option, you CANNOT call the broker and request anything. You cannot request assignment, nor can you request not to be assigned. that decision is under the control of the option owner.

    3) But is is POSSIBLE to be assigned on an option that is only a penny or two out of the money. There are legitimate, and reasonable, situations in which a professional trader will call his/her broker and tell them DO EXERCISE an OTM option.

    And if there is big news after hours, the option can be assigned even if it is further OTM.

  9. Couple years ago the auto exercise limit was more then 20 cents and at the money GOOG options would not be trading at 5 cents even at the end of the day. Nice story though
  10. ellevers


    You are correct the auto exercise was .25 and I should have had all my facts before I gave the example; had to look it up but the actually date was june 17 2005 and the actually option was the 280 calls when this happened to me. But my point is still valid for anybody that is interested in if their option will be auto exercised. The last or bid or ask at 3:00 cst has nothing to do if the option will be automatically exercised it is where the closing print happens and the closing prints doesn't mean the last print at 3:00 cst. This also doesn't mean that if you are short an option that you will be automatically exercised for the owner of the option might have other reason for exercising or not exercising. Which is what creates pin risk. People that have conversions and reversals on at the strike where the closing price prints has a decision to make on their long calls or long puts. If someone has the reversal on lets say long 50 10 calls and short 50 10 puts and short 5000 shares and the stock closes at 10 there is no certainty that the person long the 50 puts will exercise. So do you exercise all of your calls? As far as the goog calls and puts go they can very well be at a nickle or at least a nickle at a dime near the close depending on how volatile goog is being. Just last june expiration goog was hovering around the 420 strike with minutes left in the day. You could have easily bought the calls or puts at a nickle at the very least a dime. In the last minute of the day according to time and sales the 420 puts were no bid at a dime. Goog only had a six point range that expiration.
    #10     Jul 16, 2009