Auto-Exercise Threshold

What is Auto-Exercise Threshold?

Auto-Exercise Threshold The auto-exercise threshold is the minimum in-the-money amount required for the Options Clearing Corporation (OCC) to automatically exercise an option at expiration. The standard threshold is $0.01 for both customer and market maker accounts, meaning any option finishing at least one cent in the money will be exercised unless the holder instructs otherwise. How it works: At the close of trading on expiration day, the OCC compares each option's strike price to the official closing price of the underlying stock. If a long call's strike is below the closing price by at least $0.01, or a long put's strike is above it by at least $0.01, the OCC will exercise that contract automatically. This process runs after the market close and settles by the following business day (T+1 for equity options). For example, suppose you hold one AAPL $190 call and AAPL closes at $190.05 on expiration Friday. Your call is $0.05 in the money, exceeding the $0.01 threshold, so the OCC will automatically exercise it. You would be assigned 100 shares of AAPL at $190, requiring $19,000 in buying power. If you did not want this assignment, perhaps because you lack the capital or the after-hours price dropped below $190, you would need to submit a do-not-exercise (DNE) instruction to your broker before the cutoff, typically 5:30 PM ET on expiration day. Traders should pay close attention to auto-exercise when holding short options near the money at expiration. Even options that are barely in the money will be exercised, and the resulting stock position can create significant overnight risk if the underlying gaps on Monday morning. Many brokers also charge exercise and assignment fees, making it more cost-effective to close positions before expiration rather than letting them auto-exercise.