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Since OEX index options are cash settled and are American style, what would happen if you decided to exercise an out of the money put? Would you end up paying the difference between the strike and settlement price or would you be prevented from exercising it?

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Given this is an exchange traded option, the exchange contract specification should state exactly what would or could happen.

http://www.cboe.com/products/stock-index-options-spx-rut-msci-ftse/s-p-100-index-options-oex-xeo/oex-specifications

It doesn't seem to state that out of the money exercise is prohibited, so perhaps you can do it and pay the loss into your margin account - more detailed procedures are probably detailed elsewhere. However, I can't see why anyone would want to do this. I suspect that your clearer would probably try to stop you or at least ask if you know what you are doing!

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  • Permissibility of exercise and assignment is not in the domain of the CBOE. That is handled by your broker who then notifies the OCC of the exercise which then uses a Wheel procedure to randomly determine who gets assigned. IOW, whether an OTM option can be assigned is determined by the broker. My broker does not allow it. Furthermore, why would anyone exercise an OTM option and transact at inferior price? For example, XYZ is $53 and I own a $55 call. Why would I exercise my call to buy shares at $55 when I can buy them at $53 on the open market? That makes no sense. – Bob Baerker Oct 2 '20 at 18:26

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