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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?
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.
