long OTM puts at expiration - why the nasty surprise?

Discussion in 'Options' started by wmtrader, Apr 18, 2011.

  1. Perhaps you would like to be specific about what I wrote that shows a lack of understanding.
     
    #11     Apr 19, 2011
  2. What is "automatic exercise" of an option?

    The Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration, a procedure also referred to as "exercise by exception." Generally, OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. However, a specific brokerage firm's threshold for such automatic exercise may or may not be the same as OCC's.
     
    #12     Apr 19, 2011
  3. I believe I covered this case in my remarks.
     
    #13     Apr 19, 2011
  4. I must have missed it. It sounded like you thought the owner of an option had to take some action in order to exercise.

    ETA: You need to take action if you are in the money and you don't want to exercise.
     
    #14     Apr 19, 2011
  5. zdreg

    zdreg

    this is a lot of fuss over a paper trade. if it happened in reality the brokerage firm would bust the trade as they had no business to exercise without your explicit request.
     
    #15     Apr 19, 2011
  6. piezoe

    piezoe

    You broker will let you know what their policy is. Usually options expiring in the money will get exercised automatically unless you say not to. Hosewater explained it clearly.
     
    #16     Apr 19, 2011
  7. Wasn't me. That was taken directly off the CBOE page.

    Most brokers probably use the same .01 ITM threshhold as the CBOE. The comment about brokers using a different value might be old. IIRC they started auto-exercise at .25, then moved it to .05 and now it's at .01.
     
    #17     Apr 19, 2011