Hi, I'm new to trading options (I have not attempted it yet). I have a very basic question but cannot find the answer anywhere so I figured I'd come to you guys. My broker told me that all options in-the-money by $0.05 or more are automatically exercised, is this something that all brokers do? Is there a chance that in-the-money options will not be exercised because the option owner paid too much of a premium for it? Also I would assume that virtually no options that are out of the money are exercised. Correct? I am planning to write covered calls and possibly naked calls on a stock that I want (long term growth and dividends) but that I think is going to be pretty flat for the next few months.
You should do some more research before you actually start trading any options. Almost ALL options that are ITM at expiration will be exercised. Once the option is ITM the call holder has some profit in it and probably will not walk away from it. Now ... as you have heard already, most options expire worthless... mostly OTM options. Your best move would to do a Covered Call (if that what you like to do) 1-2 strikes OTM from the stock price. The return is not as good, but it has more protection from being called out. Another option that you can look at would be Using a LEAP option in place of the actually stock. This will increase the ROI over a normal CC.