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Q: Can I exercise my right to buy the stock at any time up to the expiration date?
A: As the holder of an equity call option, you can exercise you right to buy the stock throughout the life of the option up to the exercise cut-off time on the last trading day before expiration. Options exchanges have a cut-off time of 5:30pm, Eastern Standard Time, for receiving an exercise notice. However, most brokerage firms have an earlier cut-off time that should be determined in advance since it may affect when you receive delivery of the stock.
Q: What is the difference between American-style exercise and European-style exercise?
A: All standardized equity options use American-style exercise. American-style exercise means that operationally you can exercise your contract any day that the market is open before the expiration date. The last day to exercise an American-style option is usually the third Friday of the month in which the contract expires (expiration Friday). Most index options, however, use European-style exercise. This means that the only time you can operationally exercise your contract is the last trading day (usually Friday) before expiration. Remember, even though there is only one day in which you can exercise your contract, you can always close out your option position in the secondary market any day prior to expiration.
Q: Are all index options European style exercise?
A: Not all index options are European style, but most index options, it does seem, are European style. For example, the OEX S&P; 100 index option is American style. A primary reason that most cash-settled indexes are European style is probably that since there is no actual delivery of the underlying the whole concept of exercise is skewed. (Why exercise an option for cash, when you can sell the option into the market and receive cash?) In addition, early exercise causes serious timing imbalances for combination strategies using cash-settled options.
A second reason might be the mechanics of establishing a settlement price. For an American style index option like the OEX, a settlement price has to be calculated every day and the mechanics of exercise seem to argue for using the closing prices of the component stocks. But back in the 1980's the industry moved toward using the opening prices of the component stocks for calculating final settlement prices in order to reduce the volatility associated with the 'triple witching' phenomenon.
Important to remember: Thursday before Expiration is typically the last trading day for European style index options!
Q: If I exercise an in-the-money call option, how soon can I sell the stock?
A: As soon as you tell your broker you would like to exercise your right to buy the stock (strictly speaking, given "irrevocable instructions") you are deemed to be a stock owner. Because of the irrevocable nature of the call exercise, you will be buying the stock at the strike price, and you can sell those shares immediately after giving instructions to exercise.
Q: If my option closes .05 in-the-money on expiration Friday, what is my likelihood of being assigned?
A: It may be profitable for an investor to exercise an option that is in-the-money by as little as .05 and the option HOLDER has the right to exercise his contract whether the option is in or out of the money. However, for this example, the option is not in-the-money by The Option Clearing Corporation's (OCC's) automatic exercise threshold, an investor is certainly within his right to instruct their broker to exercise (or not to exercise) their option contract. Investors who do not want to be subject to assignment risk can simply close their expiring position.
Investors should consult with their broker concerning their brokerage firm's exercise policy i.e. what is the firm's automatic exercise policy and the firms deadline to submit exercise instructions.
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