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Although in-the-money calls are almost always exercised after market close on expiration Friday, there are exceptions, writes Alan Ellman of TheBlueCollarInvestor.com, and you need to know what circumstances might arise triggering this exception.

When studying the basics of option investing we learn that the option holder of an in-the-money strike has a certain amount of intrinsic value, which appears to be profit that would never be bypassed. For example, if we (as covered call writers) sold a $50 call and the stock was trading @ $52 @ 4 pm EST on expiration Friday, the holder can exercise the option and buy our shares for $50 and sell for a profit after the market opens the following week. In addition, the Options Clearing Corporation has provisions for the automatic exercise of in-the-money options at expiration, called exercise by exception. Exercise will occur automatically if the strike is $0.01 or more in-the-money. Some brokerages may not have the same threshold as the OCC but $0.01 is very common. We, as call sellers, have no control over exercise. That is up to the holder. Why then are some of our in-the-money calls not exercised?

During and After-Hours Trading
For Blue Collar Investors like us the ability to trade ends @ 4 pm EST and most options expire on the third Friday of the month (technically the Saturday after the third Friday but we cannot trade on Saturday). However, professional traders have the ability to trade for 90 minutes more, until 5:30 pm EST. Now the options-related trading is based on the composite or consolidated price based on the 4 pm price of the underlying security. The trader in this instance has until 5:30 pm to let the OCC know if he wants his options exercised. Those in-the-money options will be automatically exercised unless the trader provides a contrary exercise notice (“do not exercise”) to the OC in which case these options will not be exercised.

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