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Suppose a stock is currently at $100, and I own a call option with a strike price of $150. Suppose I choose to exercise this option. Who is the lucky person that will get a free $5000? How is that person chosen?

3 Answers 3

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The option clearing house (most likely the The Options Clearing Corporation), the one that guarantees the derivative contracts will pick one of the clearing member accounts (i.e. broker), which in turn will randomly pick an account that sold that option.

Now, I'm not sure in which situation anyone would chose to do this, but the question is valid, although would be more relevant in the case of deep, in the money, long options.

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  • I've edited the numbers in the question.
    – Flux
    Apr 23, 2020 at 4:06
  • ok, makes the questions more accurate, although still not clear in when it would make sense to take such a loss. Apr 23, 2020 at 4:13
  • It's mostly a hypothetical question.
    – Flux
    Apr 23, 2020 at 4:26
  • I figured, although I've heard of some cases where exercising an OTM may make sense. See thebluecollarinvestor.com/… for such an example. More specific than your scenario, and a very short time window to do so. Apr 23, 2020 at 4:39
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    @Pascal Belloncle - Alan Ellman of The Blue Collar Investor has a tendency for getting most of the story right but missing some of the important details of the situation. In your link he wrote: "It was obvious at this point that share price would likely decline by market open on Monday leaving the now out-of-the-money put in-the-money the following week. Exercise would benefit long put holders and put those with short positions at risk." In the after market, 30 seconds after the close, BA dropped under $390 and the short $390 put was ITM. That's why it was exercised. Apr 23, 2020 at 15:44
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I can't speak for other brokers but my broker's software will not allow this. The option must be in-the-money in order to exercise.

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The OCC (in the US) is the counter-party for all options transactions. It notifies each clearing member who holds positions in the option in question who is being assigned. The assignment is performed using a random procedure.

It is up to the clearing member to have their own policies defining which of their customers will be assigned in such a situation. The only regulatory requirement is that they abide by their policies.

Your broker may be a clearing member at the OCC, or they could have a relationship with another broker that clears for them, in which case your broker's policies would also apply to those options that have been assigned to your broker by their clearing member.

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  • Does this mean that the clearing members or brokers can practice favoritism by giving the "free money" to their favorite client?
    – Flux
    Apr 27, 2020 at 2:49
  • They have to have a policy that is reviewed by their regulator and thus would have to follow "just and equitable principles of trade". If not, they could be fined.
    – xirt
    Apr 27, 2020 at 4:03

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