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Now, I know what you're thinking. If it's in the money, isn't it good that your broker automatically exercise the options for you on expiration date?

Well, yes and no.

If you somehow managed to miss the expiration date, then that means something likely came up that made it so you weren't able to login and close the position before the expiration date. Maybe an emergency came up, and you weren't able to access internet for a while. Maybe you got into an accident and were in the hospital for some time. Whatever the reason, you weren't able to access your online broker during those time.

Now let's say you have a call option at a strike price of $1.00, and prices were currently trading at $1.50 when your call option expired, which means your call option expired in the money. So your online broker exercised it at the expiration date, and now you own 100 shares of that stock for only $1.00 each. Now, if you were to immediately go online, you would be able to sell those shares for $1.50 each, and made a profit.

But in this case, since you weren't able to access the internet for who knows how long, for whatever reason it may be, when you came back online, you find that the stock has dropped to a whooping $0.50. You just lost 50% of the exercised contract for no reason because of the forced exercise. Plus the cost of the contract itself. And for what?

Now let's talk about in the money put options. Now, I'm not completely sure how put options are handled in this case, but if they follow the same format as the call option then it would go something like this:

You have a put option at a strike price of $1.00, and prices were currently trading at $0.50 when your put option expired, which means your put option expired in the money. So your online broker exercised it at the expiration date, so now you own 100 shorted shares of that stock for $1.00. Now, if you were to immediately go online, you would be able to cover those shorted shares for only $0.50 each, and made a profit.

But in this case, since you weren't able to access the internet for who knows how long, for whatever reason it may be, when you came back online, you find that the stock has rise to a whooping $1.50, maybe $3.00, maybe $6.00, point is, there's no limit to how high a stock can go UP. Maybe you just lost all of your investment, and STILL own your online broker money, because of the forced exercise. Now what?

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    I don't trade options so someone can correct me if I'm wrong, but don't they automatically settle in cash? As in - your broker not only exercises the option automatically, but also buys/sells the shares automatically? And you just end up with cash?
    – user253751
    Jan 9 at 6:19
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    @user253751 no.
    – CQM
    Jan 9 at 7:24
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    @user253751 - In the US, most index options are European style which means that they are cash settled and can only be exercised at expiration. American style style options (equities) can be exercised at any time and they are settled with the underlying. Jan 9 at 13:49
  • @user253751 If they automatically settled in cash, then there would be no problem. If only that were the case. The simple truth is that brokers don't care about your safety when you're trading with them. Whether you win or lose, they win.
    – frosty
    Jan 9 at 20:05
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Regarding automatic exercise, brokers do not automatically exercise the options. 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 is not 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.

Per Investopedia:

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.

Regarding your concerns about being unable to access your account:

Maybe an emergency came up, and you weren't able to access internet for a while. Maybe you got into an accident and were in the hospital for some time. Whatever the reason, you weren't able to access your online broker during those time.

Suppose you bought 1,000 shares of AAPL on Wednesday for $127 and later that day you were in a car accident and needed surgery. Is it your broker's responsibility to determine at what price you should sell your shares for a tidy profit? I think that you know the answer to that. NO. It is your responsibility to manage your positions and if you were concerned about the risk, you could place a stop limit order to limit the loss as well as a trailing stop to lock in profit. Such orders could be adjusted every day.

I know first hand what's involved here. In early November I had nearly 200 long and short options in my trading account for various near term weekly expirations. These were mostly long and short collars hedging some sizable positions in 9 large cap stocks.

Shortly thereafter I contracted a bad case of Covid. After two weeks, I reached respiratory distress. I went to the emergency room fully expecting to be hospitalized. Before I went, I spent a morning closing out all of my positions because of the potential risk of an inability to continue to manage my positions if I got worse (my protective options would expire and I would then have full directional risk). I was about as sick as one could get without needing hospitalization (a silver lining?). So, been there, done that and my advice to you is to work out a contingency plan in advance for possibly being indisposed.

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  • You were fully conscious and knew of the potential risks if you don't close out your positions, therefore you were awake and ABLE to close out your positions before you were hospitalized. Which means you knew of whatever was going to happen AHEAD of time, and acted. But that's not what we're talking about here. We're talking about an unknowing accident in the future that you DON'T know about, and can't PLAN for that may keep you unconscious in the hospital for who knows how long.
    – frosty
    Jan 9 at 19:44
  • As for stop losses, those may not work for options, because if they don't hit your stop loss before the expiration date, and you're in the money, the option contracts will get AUTOMATICALLY exercised.
    – frosty
    Jan 9 at 19:46
  • As several respondents have explained to you, the market isn't designed for you convenience. If you decide to partake, you have accepted the risks that come with it. It's your responsibility to deal with it one way or another. In your scenario, the answer is as I previously wrote: IF YOU ARE LONG THE OPTION, YOU CAN DESIGNATE TO THE OCC VIA YOUR BROKER THAT IT IS NOT AUTO EXERCISED AT EXPIRATION. That covers the problem of you being UNCONSCIOUS. Other alternatives? Try the Phone-A-Friend lifeline. Jan 9 at 20:46
  • Designating it not to be auto exercised at expiration is useless because you can only do so THE DAY BEFORE it expires. So if you get into an accident TWO DAYS BEFORE it expires, then you CAN'T. Obviously trading comes with risks, but there are obvious counters for most risks. Such as stop losses. Which doesn't work in this case. Also, there's no need to be rude, or for personal attacks. We're just discussing what can or cannot be done here.
    – frosty
    Jan 9 at 21:49
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Options are automatically exercised after expiration because there is someone that is expecting that specific result.

When you buy an option, there is someone that sold an option. And vice versa.

The assumption is that someone is waiting to be delivered shares. Both parties are responsible and it is worse for the brokers to assume that one is irresponsible. Because, as options are actively traded, the brokers cannot chase people around to ask if they wanted shares or not, all the options were sent to a pool of fungible assets and they need to be quickly matched up with shares and closed out.

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    Not quite. If I am on the winning side of an option trade, and the option weren't automatically exercised, the other side of the trade, the option seller, would benefit, and would be happy with that result. If I buy a put from you, and can sell you shares of a stock for $100, but it trades at $80, you are happy not to be stuck with that. But, the second thought in your answer is correct, brokers can't chase every customer around to see if they wish to exercise. Nor, when I have a spread that's deep in the money, do I care to have to manually exercise the long side. Jan 9 at 14:18
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Maybe an emergency came up, and you weren't able to access internet for a while. Maybe you got into an accident and were in the hospital for some time. Whatever the reason, you weren't able to access your online broker during those time.

Suppose you bought some shares at $1.00 each, hoping/expecting them to rise in value. Shortly after, an emergency/accident hospitalised you. During that time, the shares did indeed rise to $1.50, but being in hospital you were unable to realize your profit. Unfortunately, by the time you left hospital and were able to contact your broker, the shares had dropped to $0.50.

There's not a lot of difference between what you're asking about and expecting your broker to have automatically sold the shares when they were at $1.50.

Essentially, there are four1 things that you can do when call options approach/reach expiry:

  1. Let the call options lapse. You choose not to exercise your right to buy the underlying shares.

  2. Before expiry, sell the call options to someone else who then owns the right to purchase the underlying shares.

  3. Exercise the call options and immediately sell the underlying shares you (briefly) acquire.

  4. Exercise the call options and acquire the underlying shares, which you keep (at least for the time being).

In the absence of instructions from you, what should a broker do? From their point-of-view, (1) would be the simplest (essentially, "do nothing"), but I doubt anyone would be happy with that choice if the options expire in-the-money. One problem with them choosing option (2) or (3) is that you might have originally bought the options with the intent to hold the underlying shares (plus, with option (2) they would have to do "extra work" to find a buyer).

Overall, it seems to me that option (4) – exercise an ITM option and retain the underlying shares – is the natural "default choice" for the broker to make: it's the simplest for them (other than letting the options lapse) and doesn't try to "second guess" why you bought the options in the first place.

According to Question 11.3.5.5: Will my broker automatically exercise options that expire in-the-money? of the The Options Industry Council FAQ:

Each brokerage firm has a procedure outlined in your account agreement forms. Customers should be familiar with these procedures. The option holder can always submit instructions to their broker regarding whether to exercise or not to exercise.

This suggests (though I have no experience of trying) that if you are unhappy with your broker choosing option (4), you may be able to submit instructions to them to pick another option.


1 As Bob Baerker correctly pointed out, the distinction between (3) and (4) (whether or not to hold the shares acquired) is not part of "the option process", but a separate investment choice. However, the overall result of those two separate choices does give four outcomes.

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  • I edited your answer because it is incorrect. Whether you choose to hold or sell shares acquired shares (3) and (4) has nothing to do with the option process. That's an unrelated subsequent decision. You used the word options rather than calls. You should specify calls rather than options because puts have different results than you explained (1) , (2) , (3) and (4). You probably don't like being edited but as written, overall your answer is non specific and could mislead some readers. Jan 9 at 14:42
  • I don't mind being edited (too much:-)), but I rolled-back because removing one of the options made the following discussion confusing (since I referred to option 4), but I'll happily edit-in "call options" as I realise "options" is ambiguous. I included (3) and (4) as things that the owner can do, not necessarily because they're "part of the option process". Let me edit...
    – TripeHound
    Jan 9 at 14:49
  • You can close options before expiration, let them expire or let them be exercised. However, the ensuing result of exercise of puts and exercise of calls is different and that's where the generic usage of "options" is misleading. Jan 9 at 14:55
  • @BobBaerker Thanks for the feedback. I've hopefully clarified "call options"... I've kept the original four options (choices) (with a note that the decision to sell the acquired shares or not is a separate one).
    – TripeHound
    Jan 9 at 15:11
  • If brokers are able to automatically exercise the options when they're in the money, can't they also automatically sell it at the currently market price, before giving you the money, instead of handing you the stocks themselves with the risks of it as well, when they know for some reason you were not able to interact with the options on expiration date? Yes, for regular stocks, if you were hospitalized, the broker has zero responsibilities over them. But when I hear something like RIGHT, but not OBGLIGATION, I expect RIGHT, and NOT OBGLIGATION. Which isn't true when you're in the money.
    – frosty
    Jan 9 at 19:55
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Options are not forcibly exercised when they expire in the money. If you own an option, and you don't want your broker to exercise it even if it expires your money, you can instruct your broker not to.

Source: The Options Industry Council FAQ, Options Exercise, question 11.3.5.5:

The option holder can always submit instructions to their broker regarding whether to exercise or not to exercise. A customer may decide not to exercise an in-the-money option in some cases.

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You have a right but not a duty to vote in the 2020 presidential election. That doesn't mean you can exercise that right on November 4th. Inaction is still an action, exercised by your choice alone.

Don't you agree to the terms when you buy your options? When you open an account with your broker?

Imagine your question being asked in any other economic dynamic:

I had every intent to return my VHS tape to Blockbuster on time, but a broken down car prevented me from doing so. I shouldn't have to suffer the fine.

Kind of sounds stupid when put that way, doesn't it? Its all about personal responsibility. And, dare I say, the inherent risks in the market you choose to operate in. We all occasionally regret buying too soon or too late, selling too soon or too late. It goes with the territory.

Someone has to suffer the loss, don't they? Someone has to eat the difference. Why not the person who chose to take on the risk? Who else?

You're essentially complaining about consequences when two aspects of your personal life, poorly coordinated by you, collide and have undesirable results. Ad hoc rationalizations and hindsight-bias, posterior risk aversion isn't a get-out-of-jail-free card, despite what leftist academia tells you.

Those are my genuine thoughts on your "hypothetical" scenario.

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  • "a broken down car prevented me from doing so. I shouldn't have to suffer the fine. Kind of sounds stupid when put that way, doesn't it?" Many people make that argument in the name of "fairness".
    – RonJohn
    Jan 9 at 19:12
  • @RonJohn Elaborate, please. What argument? By what definition of fairness? Seems to me OP is arguing FOR not taking personal responsibilities simply because he regrets the outcome. Knowing full well someone has to pay the price, even if its the broker. Is this more fair? Jan 9 at 19:13
  • More than a lot of times I've seen people claim "I don't deserve a fine/penalty/etc because my car broke down/I was in an accident/etc. It's not my fault!""
    – RonJohn
    Jan 9 at 19:16
  • Ah yes... I agree. Its the culture some have tried to seed and its causing a lot of problems, in many aspects of life, for those who subscribe to it. Jan 9 at 19:17
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    You seem almost resentful of the notion that youre expected to know the terms of the agreement, and are held to them. You seem resentful of the fact that you suffer consequences for ignorance, forgetfulness, poor planning, poor decisions, or even pure bad luck. Welcome to life. Jan 9 at 20:56

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