OTM option expiration

Discussion in 'Options' started by heech, Jan 27, 2010.

  1. heech



    Maybe this question belongs in the energy futures section... since it relates to heating oil. In any case...

    On the HO options expiring yesterday, I had two short *OTM* options that were subsequently exercised. Strike was 1.95, and settlement was 1.9508. (And market traded above 1.95 consistently after settlement.)

    I was surprised. I've seen ITM options right at the market abandoned before, but I didn't even know there was a procedure for exercising OTM options. (And don't ask me for the logic behind the move...)

    So, basic question:

    1) is this pretty common?
    2) and a less answerable one... why!?
  2. Sometimes it's optimal to exercise suboptimally... Where was the contract trading at the time? For instance, in a rather extreme example, if the contract was 1.94/1.97 in the mkt, exercising puts suboptimally at 1.95 would have been a good idea. This is just one of the possibilities. Others would depend on the exact mechanism of determining the expiry px and there's a few scenarios I can think of.

    I have done this in the past (not in energy futs, obviously), but it's not too common, as you have to be smack on the strike.