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I understand that this is basically an automated way to exercise an option for a customer as close to expiration time as possible, but I'm curious about how the system operates precisely.

Does the oracle check the prices continuously, say, every minute, or only once on the expiration date? Is there a standard protocol for exercise oracles, followed by all brokers and exchanges?

  • What country are these exchanges on and what are exercise oracles? – Bob Baerker Jun 7 at 11:28
  • I've read about exercise oracles in a paper and thought to post the question here in case anyone knows more about them. – Paul Razvan Berg Jun 7 at 13:55
  • OK, you've read about exercise oracles. What are they? – Bob Baerker Jun 7 at 20:24
  • Citing: "The exercise oracle looks at a price oracle at the time of expiry to determine if an option is in or out of the money" – Paul Razvan Berg Jun 7 at 20:31
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    US option exchanges allow exercise until 5:30 PM EST on expiration day though brokers may have an earlier cut-off time in order to meet submission deadlines. As mentioned by xirt, the OCC will exercise all options that expire one cent or more ITM at expiration. This is called Exercise by Exception. If you are long the option, you can designate to the OCC via your broker that you option not be auto exercised at expiration. As for your link, sorry but I can't help you. I only trade exchange traded options. – Bob Baerker Jun 7 at 20:52
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I haven't heard of the term "exercise oracle" but the US Option Clearing Corporation introduced an automatic exercise methodology a few years ago where after the close on expiration day, if at the close of the market the option was a penny or more in-the-money the option would automatically be exercised, unless the holder of the option issued a "contrary exercise instruction".

The closing price is determined from the closing price of the underlying security transmitted to the consolidated tape at the exchange close. From that, it is possible to determine whether or not an option is in the money (simple arithmetic).

Options clearing organizations in other jurisdictions using other security types may use a different methodology.

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