The question is mainly about if a DITM put at expiration would ever not get exercised for whatever reason. Given that margin requirements will not be an issue that may prevent assignments (as I understand from the responses so far) can there be any other reason due to which an exercise will not occur except for stock movements after the closing of the trading day on Friday?
The holder of the put who have to abandon the put. There would be almost no rational reason to do this.
New change to options auto-exercise rules. The Options Clearing Corporation (OCC) rules governing the automatic exercise of in-the-money equity options at expiration are changing. Effective Saturday, June 21, 2008, any equity option that is $0.01 or greater in the money at expiration will be automatically exercised. The previous threshold was $0.05.
This is posted all over TD: "It has been standard practice for US-listed options to automatically exercise all long equity options positions that are at least $0.05 in-the-money. Starting with the standard equity expiration on June 21, 2008 and effective for all equity expirations thereafter, all US-listed options that are $0.01 in-the-money, based on the "composite" or "consolidated" closing or last sale price reported by the Options Clearing Corporation (OCC) price vendors for underlying security prices on the final trading day prior to options expiration, will be automatically exercised." Now if it's close you should check w your broker to determine the real closing price cause sometimes those close will bounce around after the close. (I think the official close isn't determined until 4:15 EST.) If you're DITM and short a put - I'd roll out out a few days early or wait for the assignment. I have been assigned upto about 2 weeks early and I've been called out (covered calls) also upto about 2 weeks early. Oh and I've been called out on OTM options after expiration which surprised me, but it was a gift as I got a free 1.50$ on FAS - can't explain that one... but I was happy to buy it on Monday morning and write more calls.
Dang got beat by seconds with quote... Robert did they ever come up with a system that allows you to exercise early if a stock was halted ? I know there were several high profile Chinese stocks that got halted and the put buyers got screwed cause the last trading price was not ITM for them. I'd google this but I'm tired ~ and keep forgetting to look it up til reading thread.
In order for a in the money option not to be exercised at expiration, a Contrary exercise must be filed by 5:30pm et on the Friday of expiration (different brokerages will have different cutoff times to enable them to meet this OCC requirement). So it is extremely unlikely for a deep in the money put not to be exercised. A market moving event would have to come out after the close and the expected move would have to be very great.
Actually I had a question on this too. If you choose not to exercise (like with IB where you have that option straight from the platform itself) what happens? Do you lose all your debit or do they net the difference between what you paid and the final expiration day price of the option and give you back the profit (if any) ?
No, they don't give you back the profit. If you want to lock in the profit you either close out prior to expiration or go through the exercise and then close out the stock position. If you choose not to exercise then that's it, you don't get anything.
No, unless there is some dramatic move afterhours, it is virtually impossible for a DITM put not to be exercised at expiration.