What's the point of abandoning an in-the-money option? (i.e., not exercising it)
(Related: Exercise an out of the money option)
asked Aug 5, 2017 at 22:32
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Your wording suggests that you have reason to believe that people do, in fact, allow in-the-money options to expire without exercising them. Where have you heard this?– farnsyAug 6, 2017 at 1:33
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@farnsy because the CME forbids it for some options e.g. money.stackexchange.com/a/83667/5656– Franck DernoncourtAug 6, 2017 at 2:13
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It depends on exchange. Most are exercised automatically and one doesn't need to do anything.– DheerAug 6, 2017 at 6:00
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@Dheer what depends on exchange?– Franck DernoncourtAug 6, 2017 at 15:53
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@FranckDernoncourt "In-The-Money" option being automatically exercised and difference settled in cash.– DheerAug 7, 2017 at 3:04
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2 Answers
Ignorance - people might not pay attention to the value, or forgot that they had them.
Fees - the gain could be too small and eaten away by fees, so it's cheaper to abandon them.
Knowledge - people might not understand that they miss a chance to cash in
Formal errors - when the execution is incorrectly filed and fails therefore, and the time is already run out when they realize.
If you want a position in the underlying (American style option), it makes sense to do nothing.
If you don't want the position then in most cases it makes more sense to sell the option rather than exercising it and then having to close the underlying position (extra commissions and B/A slippage), especially if there is any time premium remaining.
If a long option is barely ITM, it makes sense to abandon it if the closing commission cost(s) to close exceeds the ITM amount.
The OCC automatically exercises all options that are one cent ITM at expiration (Exercise By Exception). In order to avoid this, you can notify the OCC via your broker that your long option not be exercised. This allows you to abandon the option but not take on risk due to auto exercise and then price change.
Sometimes, the bid for deep ITM options is below intrinsic value. If so, it makes sense to execute the opposing transaction in the underlying and exercise the option so that you avoid the haircut. For a call, this would mean shorting the underlying first to lock in the difference and then exercising the call.
answered Oct 23, 2018 at 13:02
