Does ETrade Automatically Exercise Options?

Does ETrade Automatically Exercise Options?

In general, options come with certain benefits, such as the possibility of profiting not just from a rising stock, but also from a falling stock. One question, however, is whether E*Trade automatically exercises its options?

If your ‘put option’ reaches the expiration date on E*Trade, then equity options worth $0.001 or more in the money will be automatically exercised for you unless you instruct E*Trade not to exercise them.

This article talks about different types of options, when call option be exercised automatically and what are some of the things which you should keep in mind before purchasing options.

What are options?

By definition, an option is a contract that gives the bearer the right but not the obligation to buy or sell some underlying asset at some predetermined price at or before the expiration date. You can purchase options using a brokerage investment account, just like other assets.

There are two broad categories of options: ‘call options’ & ‘put options’. The former gives the owner the right to buy a stock at a specific price and put options give the owner the right to sell a stock at a specific price.

What does ITM mean?

The term ‘In- The- Money (“ITM”) refers to the intrinsic value of an option. Before contemplating actual options trading, all options traders should understand what In-The-Money Options ( ITM Options ) is. Two other options statuses are ‘Out- Of- The Money (OTM) and At- The- Money (ATM).

When is a call option ITM?

When the strike price of a call option is lower than the prevailing market price of the underlying stock, the call option is considered in the money (ITM ) and its owner may exercise the call option and purchase the stock at a lower price than the market price.

For Example:
If Alphabet Inc. is trading at four hundred dollars ($400), its three hundred dollars ($300) strike call options would be ITM since it is possible to purchase shares of Alphabet Inc. for $300 rather than $400. An intrinsic value of one hundred dollars ($100) is therefore assigned to the $300 strike call option. 

When is a call option exercised automatically?

If you have enough funds available to buy the underlying stocks at the strike price when your call options expire ITM, the Options Clearing Corporation (“OCC”) will automatically exercise your ITM call options.

On expiration day, any expiring options that close $0.01 ITM or more will be automatically exercised by the Options Clearing Corporation (OCC).

For Example:
If the closing price of the underlying security is $25.01 or higher at expiration, the $25 call will be automatically exercised. The exercise instructions for an option will need to be given to an E*Trade Securities broker by calling 1-800-ETRADE-1 if the closing price is below $25.01. Alternatively, if the closing price of the stock at expiration is higher than $25.01 and you do not wish to exercise the call option, you will need to contact a broker at E*TRADE Securities.

A few additional things to keep in mind:

  • If your index options are $0.01 or more in the money, E*Trade will automatically exercise them unless you instruct them not to.
  • An out-of-the-money option is worthless upon expiration.
  • Before expiration, American style options may be exercised.
  •  A broker at E*TRADE Securities can help you exercise options or submit instructions to not exercise them.
  • You will not be charged any broker fees for trades facilitated by such a broker. However, you will incur the regular commissions for trades facilitated by such broker(s).
  •  An alert will be sent to you whenever an equity option is exercised or assigned. In View Orders, you can also find out what stock you bought or sold, how many shares, and the strike price for your transaction.

Conclusion

Apart from the call option, if the put option strike price is greater than the market price of the underlying stock, it is considered ITM and the owner can sell the underlying stock for a higher price by exercising the put option.

You will hold short positions of the underlying stock when your Put Options expire ITM and your ITM put options will be automatically assigned.

It is possible that, if you do not have enough purchasing power in your account to accept or exercise the assignment, your expiring options positions may be closed, without notice, on the last trading day for those options.


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