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Ask Our Pros: Forgotten Calls

Steve Smith explains the fate of options that aren't exercised by expiration.

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Reader:

What happens if I have some in-the-money calls and forget to close them prior to expiration?

-- B.R.

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Steve Smith:

The Options Clearing Corp.'s rules regarding exercise by exception, often referred to as automatic exercise, require that all customers' equity options that are 25 cents or more in-the-money automatically be exercised. For index options, the auto-exercise threshold is just a penny. For institutional customers, broker dealers and market makers, the threshold for equity options is just 15 cents.

These levels actually were reduced from 75 cents and 25 cents, respectively, in September 2004. A study by the OCC revealed that nearly 90% of all options less than 25 cents in-the-money were being exercised, up from about 60% five years earlier. The change most likely reflected the steep drop in trading costs, which made it economical to exercise and try to capture profits for closer in-the-money options.

So don't fret if you forget to sell out a position. Even if you fail to notify your broker, any option that retains at least a 25-cent value will be exercised.

But remember

, you then will be long (in the case of a call option) or short (in the case of puts) the stock on Monday morning. The flip side for those short options is that you should expect to receive an assignment on any options that settle 25 cents or more in-the-money. Most index products are cash-settled, so the exercise simply will be reflected in your account balance.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;

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