Ask the Institute

DATE:  October 08, 2012

QUESTION:

Can you please explain the important points of automatic exercise?

ANSWER:
There are four points you should understand regarding automatic exercise. First, automatic exercise only happens on the last day of trading before an option expires. Typically, this is a Friday afternoon. Second, automatic exercise occurs if an option is one penny or more in the money. Third, if you own a call that is subject to automatic exercise and you do not want to exercise, there are alternate steps you can including instructing your broker to enter a contrary exercise notice on your behalf. Fourth, you should be aware that automatic exercise is conducted by The Options Clearing Corporation, and not your broker. So, if you need to submit a contrary exercise notice, it is essential that you follow your broker’s procedures prior to the time deadline. To learn more about the rules of automatic exercise, view this week's segment of "Ask the Institute."