So what happens? Does the option expire worthless if you don't exercise, or does the profit automaticaly end up in your account without you doing anything?
Each brokerage firm has a procedure that is spelled out in your account agreement forms. The Options Clearing Corporation ("OCC") uses the 75 cent threshold for customer orders, but your firm may have a different threshold. Here is how The OCC describes it: EXERCISE BY EXCEPTION âExercise by exceptionâ 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. âExercise by exceptionâ 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 âexercise by exceptionâ 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: âThe 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 customersâ accounts should or must be exercised.â (Rule 805, Interpretation .02) EXERCISE THRESHOLDS Expiring options subject to exercise by exception use the following thresholds to trigger exercise: Equity options: 3/4 point per share in-the-money in the customer account; 1/4 point per share in-the-money in firm and market maker accounts. Index options: $1.00 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 âclosing priceâ of the underlying security. The âexercise by exceptionâ procedure for expiring options described above is sometimes incorrectly referred to as âautomatic exerciseâ. It is important to note âexercise by exceptionâ 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 âexercise by exceptionâ trigger âautomaticâ exercise only in the absence of contrary instructions from the Clearing Member. Because the right of choice is always involved in âexercise by exceptionâ, exercise under these procedures is not, strictly speaking, âautomaticâ.
Geez, you mean they won't just hand me a big bag of money tomorrow, I need to do something? lol. Thanks.