Generally, all calls where the closing price on Friday is at or above the strike price are called by general convention; those below are not--even if the broker is given no instructions. However, one has to look at the individual brokerage account agreement, for they may require an instruction regardless of the "convention" between brokers. Thus, the optionee could choose and elect to exercise his option even though the closing price is below the strike price. It's rare, but possible. Then, the clearing house looks to those brokerage firms who have a short position (i.e., more calls written than bought) and under one of methods (first option written in first out, random selection) choose which client accounts will have to deliver the stock, and of course, it may or may not be yours.
The CBOE website has some great articles on options and discusses in greater detail the above. The articles are in Adobe format and may be downloaded for reading at your leisure, print out or future reference. They also discuss pricing and were, for me, a great help after reading Dan's gracious answers to my questions.
The situation in the prior post is pretty accurate. The presence of a dividend paying stock alters the exercise decision. The owner of the stock, not the option, is entitled to the dividend. Therefore, there is an incentive to the optionee to exercise early in order to get the cash dividend in his or her pocket. |
