CME doesn't know what an option is

Good god, so much righteous indignation, because the exchange has decided to disallow suboptimal exercise on these...

The exchange decides what the contract is and they probably don't give a rat's a** that, technically, what they have defined isn't quite right, according to the "letter of the law". If I had to guess, they probably did it in the interest of avoiding complexity.

You're just going to grin and bear it, I'm afraid.

@JackRab: I remember the bund episode. We made a buck or thereabouts on that. Apparently, it was a gift from a vol desk at one of the Frenchie banks.

 

Why not just sell your option for a profit? Why would you possible want to let an in-the-money option expire without exercising?

It seems that you're complaining about not being able to do something that no rational person would ever want to do.

 

If the CME does not know what an option is, then why don't you call them an explain to them what an option is? Hmm?

312 930 1000

 

There are some rare specific cases where it could be rational to exercise a marginally OTM option, which may appear suboptimal, but isn't. However. the underlying here is very liquid, so it's probably not worth it to allow such a thing.

 

You can do that. I think the OP is arguing that they should be able to not exercise an ITM option.

 

I could be interpreting the spec wrong, but the statement that "contrarian instructions are not allowed" suggests that neither of the two things are possible.

 

You may be right on that, I've never tried. Are you thinking pin risk issues?

 

Sorta, yeah... It's just that, occasionally, when you're right on the strike you could save yourself some bid/offer by exercising a slightly OTM option.

 

The main thing I was trying to get at is in general option buyers aren't obligated to their trade. With CME setting the contract specs in this way, buyers are obligated.

The quarterly options do allow non exercise.

Thanks for your thoughts.

 

Look at it from the perspective of the option sellers, most of whom are using the options as part of a bigger strategy. Not knowing until the next day if the option you sold was exercised, even when it expired ITM, makes it impossible to hedge your exposure and makes those options significantly less valuable/useful. CME is in the business of facilitating as many option trades as possible. When you weigh the very occasional retail guy who wants to not exercise his 2 ITM ES options with the thousands of other traders for whom such a policy would greatly decrease the utility of the product, it's pretty clear why the specs are what they are. Like I said earlier, cash settled options solve your problem.