Hey everyone, Kirk here again and welcome back to the daily call. Today, we’re going to answer the question, “Will my broker automatically exercise options that are ITM or in the money?” The short answer to this is yes, they will if you let that contract go through the expiration date or process. If you’re trading a contract that's 30 days out from expiration and you’re long that contract, then your broker is not going to go ahead and automatically exercise your contract until you get through the expiration date. If you were to leave that long option contract on and in place and that option was in the money at expiration, meaning for call options that the stock is higher than your strike price, for put options, a stock is lower than your strike price, if your option contract is in the money at expiration, yes, your broker will assume that you want to get delivery of those long or short shares and they will automatically exercise your contracts. The good news here is in most cases, you have the choice of whether you want to go through that process or not. It’s just literally a matter of deciding to let the contract go through exercise and expiration or not or closing the position out early, removing the risk, selling the option contract back, buying it back, etcetera.
The reason that brokers do this is because that fulfils the contractual obligation of that contract, that at expiration, you would either be delivered or assigned shares as part of that option contract. Now, they won’t do this obviously if any of your options are out of the money. Out of the money options have no intrinsic value. They have no value if they were assigned or exercised, so they just expire. They expire worthless and there's nothing to them. It's very similar… Just so you know how it works, it’s very similar to an insurance contract on your house. If you buy insurance on your house in case it burns down and at the end of the year, the house doesn’t burn down hopefully, then that insurance contract expires and you renew for another year. You have another premium that you have to pay that protects you for the next year moving forward and it’s the exact same concept. If those contracts are out of the money, meaning nothing happened, the stock didn't move the way that you thought it was going to move, then the contracts just expire out of the money and worthless. If they expire and go through the expiration process in the money, then yes, your broker will automatically exercise those for you and then at that point, you’ll get a notification that you have the shares or that you need to deliver the shares basically or deliver the capital to maintain the share position in your account.
As always, hopefully this helps out. I know it was a short one, but I want to answer a lot of these questions. Again, if you have questions related to this topic or related to anything basically in options trading, let us know. Shoot us an email. Send me a message on Facebook, on Twitter, Instagram. Head on over to optionalpha.com/ask and click the big red button in the middle of the screen to leave me a private voicemail and then we’ll get those questions queued up and answered on upcoming daily calls and Facebook Lives. Until next time, happy trading!
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