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Automatic exercise is a procedure implemented to protect an option holder where the Option Clearing Corporation (OCC) will automatically exercise an "in the money" option for the holder, typically at an option's expiration date and time.

Does "in the money" mean

  1. Market price - strike price > 0

or

  1. Market price - strike price - commission > 0
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For a call option, it means the price of the underlying (stock) is at least $0.01 above the strike.

The payoff is independent of the premium but at expiration the premium would be zero anyway, as there is no time value left.

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  • The premium of an option is the current market price (intrinsic value if ITM plus the time premium). In the OP's expiration scenario, the premium would only be intrinsic. – Bob Baerker Jun 19 at 14:04
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A call option is in-the-money (ITM) if the market price is above the strike price.

A put option is in-the-money if the market price is below the strike price.

In the US, if an option is one cent or more in-the-money (ITM) at expiration, the Option Clearing Corp (OCC) will automatically exercise options whether they are long or short. This is called Exercise by Exception. For equity options, you will end up with a long or short position in the underlying (index options are cash settled).

If you are long the option, you can designate to the OCC via your broker that it not be auto exercised at expiration. This would make sense if it is ITM by pennies and your commission and/or fees to close the position exceeds the ITM amount.

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