Let's say a broker has a client who had a call option that was out of the money at the close of trading. The client did not elect to exercise the option and instead opted to let it expire worthless. However, in after hours the underlying moved and the option had some value. So the broker could exercise the call option and short an equal amount of shares in the aftermarket to lock in a guaranteed profit. The client would never know. Is the broker allowed to do that?
The owner of the options is the only one that can file an exception to exercise an OTM option. If you can't pay for the stock that will get assigned, a broker may file an exception to not exercise as the broker would be taking too much risk.
Thanks Robert. If one was short the 292.5 calls on SPY expiring today, do you think it would get assigned? SPY was trading above that at 4:00 and 4:15 PST, but there was some news that dropped it to 291 currently. Although it looks like that news did not come out until 4:58 PM EST which is after the option exercise deadline for many brokers although the OCC deadline is 4:30 CT. I expect that institutions would have until the OCC deadline at 4:30 CT (5:30 EST) and would be able to cancel the exercise of those long calls if they decided to.
Interesting. OI is only 1360 before today. I would assume most of that would get assigned. Let us know tomorrow.
Hey Robert, sorry about that, I got confused. I had short puts as well as calls -- I got assigned the puts, but not the calls. So I was able to sell half the shares per-market at a small loss. I sold calls against the remaining.