Important note: There is one major misconception that is fairly common among option rookies. It leads to a great deal of confusion and I want to be certain that it never happens to you. This discussion is important enough to justify its own blog entry.
·The owner of an option has certain rights.
·The seller of an option has NO rights.
·Only the owner of an option can exercise the option.
·The owner of an option is NOT obligated to exercise, but has the right to do so.
·The owner of an option has three choices:
oSell the option.
oExercise the option.
oAllow the option to expire worthless.
·The seller of an option has only two choices:
oRepurchase the option sold earlier – but it must be repurchased before the seller is assigned an exercise notice. That removes the option from your portfolio and cancels all obligations.
oWait for expiration to learn whether you have been assigned an exercise notice.
That notification arrives before the market opens for trading on the business day following expiration.
Most brokers provide that information on Sunday, following expiration. But only for online accounts.
·The decision to exercise rests entirely with the option owner.
·The option seller may not request that the option be exercised.
·The option seller may not ask the option owner ‘please do not exercise’.
·Once the option is exercised and the option seller is assigned an exercise notice, the transaction is final. It cannot be undone.
·Automatic exercise:
oIf an option is in the money by one penny or more, it is automatically exercised.
The ‘closing price’ of the underlying stock that determines whether an option qualifies for automatic exercise is the last tick on the primary exchange on which the stock trades (usually the NYSE or NASDAQ) on the last day that the option trades (almost always the 3rd Friday of the month).
If the stock moves above or below the strike price AFTER the market closes on expiration Friday, that price change is ignored for the purposes of the automatic exercise rule.
oOption owners:
May submit instructions to their brokers, telling them “do not exercise.” This is a reasonable action when the option is only in the money by a penny or two.
Each broker has its own rules and cutoff time for submitting such a notice. Be certain you are aware of your broker’s requirements.
May submit instructions to their brokers telling them DO exercise, even when the option is out of the money. This does not happen often, but it does happen.
oOption sellers:
May not request that an option be exercised.
May not request than an option not be exercised.
Have no rights. None.
Bottom line: If you sell options, such as in covered call writing, you have no say in the decision to exercise that option.
Read a review of The Rookie’s Guide to Options: http://www.condoroptions.com/index.php/book
