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 '14 at 19:43
  • Thanks. Am just wondering if someone tries to do it just to screw up the counterparty (seller) – Victor123 Nov 13 '14 at 19:48
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    Screw up the counterparty by giving them free money? – Mike Scott Nov 13 '14 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 '18 at 20:48

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 '14 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 '14 at 20:48

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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