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For listed options in NYSE,CBOE, is it possible for an option holder to exercise an option even if it is not in the money? What about early exercise for OTM American option, is it possible? Under what circumstances would someone do it?

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    Why would you ever want to exercise an out-of-the-money option? Just buy or sell the actual security instead, and it will accomplish exactly the same result at a lower cost.
    – Mike Scott
    Nov 13, 2014 at 19:43
  • Thanks. Am just wondering if someone tries to do it just to screw up the counterparty (seller)
    – Victor123
    Nov 13, 2014 at 19:48
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    Screw up the counterparty by giving them free money?
    – Mike Scott
    Nov 13, 2014 at 19:49
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    The answer is yes, and for the exact reason, Victor said, to screw up the sellers. I once exercised several thousand slightly out of the money put options in a commodity. Then overnight, into a thin market, I started wailing on the future. Everyone came in the next morning to find out, unexpectedly, that they were long in a falling market. When they went to flatten out, the fun ensued.
    – derivs
    Oct 1, 2018 at 20:48

4 Answers 4

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It is possible to exercise an out of the money option contract.

Reasons to do this:

  • You want a large stake of voting shares at any price without moving the market and could not get enough options contracts at a near the money strike price, so you decided to go out of the money. Then exercised all the contracts and suddenly you have a large influential position in the stock and nobody saw it coming. This may be favorable if the paper loss is less than the loss of time value that would have been incurred if you chose contracts near the money at further expiration dates, in search of liquidity.

  • Some convoluted tax reason.

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    Your first bullet point is quite similar to how the Hunt Brothers tried to corner the silver market.
    – Matthew
    Nov 14, 2014 at 20:40
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    @Matthew yes, if I recall correctly, I believe they planned to exercise futures contracts, but the margin requirements changed on them while they were holding the futures and ended up in forced liquidation, which in turn caused the market to also move against them because their position was so large. If they weren't being greedy on leverage, they could have accomplished this
    – CQM
    Nov 14, 2014 at 20:48
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For listed options in NYSE,CBOE, is it possible for an option holder to exercise an option even if it is not in the money?

Abandonment of in-the-money options or the exercise of out-of-the-money options are referred as contrarian instructions. They are sometimes forbidden, e.g. see CME - Weekly & End-of-Month (EOM) Options on Standard & E-mini S&P 500 Futures (mirror):

In addition to offering European-style alternatives (which by definition can only be exercised on expiration day), both the weekly and EOM options prohibit contrarian instructions (the abandonment of in-the-money options, or the exercise of out-of-the-money options). Thus, at expiration, all in-the-money options are automatically exercised, whereas all options not in-the-money are automatically abandoned.

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It may be favourable to exercise a slightly out-of-the money call option just before the ex-dividend date, especially if the dividend exceeds the (negative) intrinsic value. Practically speaking, the dividend subsidizes your asset purchase. I have had stocks scooped out from under me in exactly this short call situation.

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  • There is no such thing as negative intrinsic value in an OTM call. Dividends subsidize nothing since share price is reduced by the amount of the dividend. Jan 22 at 20:00
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You might want to exercise an otm call option if you are in a short squeeze play. Market makers on the short side of the squeeze play may need extra funds and may sell buyers of shorted stock call options in order to gain extra funds to meet margin requirements. If buyers of said stock wisen up and exercise the call options that are otm the market maker will be forced to buy the shares at whatever price thus forcing the price up which will cause a gamma squeeze or if the market maker is super corrupt they may just let those shares become ftds(failure to delivers).

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  • It makes no sense to exercise an OTM call if you can buy the stock at a lower price. Market makers may sell buyers of shorted stock call options in order to gain extra funds to meet margin requirements. That statement really needs cleaning up. Jan 22 at 19:59
  • I think the idea is that if there is a corrupt conglomerate that is allowed to be both market maker and a severely naked short hedge fund that makes a killing off of OTM expired options in a stock where they have excessive control over the price, it might be better for the squeezers to force them to buy shares by exercising instead of just buying shares at a lower cost, which, unlike options executions can be re-routed through PFOF to OTC to remove their impact on price, assuming you have a PFOF broker. Apr 5 at 18:44

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