How Do Options Exchanges Handle Automatic Exercise for Expiring Options?
Most options exchanges have a procedure for automatic exercise, often called “exercise by exception.” Under this rule, an option that is in-the-money by a certain threshold (e.g. $0.01) at the close of trading on its expiration day is automatically exercised by the clearinghouse on behalf of the holder.
This is done to ensure that option holders do not inadvertently forfeit the intrinsic value of their contracts. Holders of options that they do not want to be exercised must submit a “contrary exercise instruction” to their broker.
Glossar
Automatic Exercise Process
Procedure ⎊ The Automatic Exercise Process defines the precise sequence of operations executed by a clearing house or exchange at an option's maturity.
Automatic Exercise
Execution ⎊ Automatic Exercise is the predetermined, non-discretionary activation of an option contract's embedded right to buy or sell the underlying asset at the strike price.