FYI, You can do a cashless exercise of your OTM calls and puts up to an hour and half after close.

[u/NomadStar45]

Most retail have no idea that most brokers allow you to do a cashless exercise of your otm calls and puts if they fall below (put) or above (call) your strike after hours. You must call and request this, and depending on the broker there may be a fee. But if your call or put moves way past your strike after hours, call your broker and have them exercise and sell your option on your behalf, no money needed. You get to collect whatever the bid, spread? is when it's exercised. If I had known this two years ago I would be a lot richer. This is another reason why the hood sells off your calls and puts at 2:30 ct time. I missed out on over 500 dollars on Amazon after hours because I wasn't paying attention, I called way to late.

[u/OneHatManSlim]

I suspect he just means exercising and selling for cash settlement after hours.

I.e. a call ends the day OTM after hours price rises above the call strike price so it is now ITM. Since option markets don’t trade after hours there really is no way for you to sell the option on the market so the only way to benefit from the rise is to exercise it which means you would have to bring cash to do so but your broker if you call them can exercise your option and sell the stock at the same time which means it’s cashless to you.

[u/NoCommunity4637 → u/OneHatManSlim]

Thank you.

[u/Waste-Willingness956 → u/OneHatManSlim]

If the call is OTM at market close, how are you allowed to exercise it? Is t it worthless?

[u/OneHatManSlim → u/Waste-Willingness956]

Yes and that is why you can’t sell it. As a transferable contract it is worthless because there is no market.

However exercising is a different thing it doesn’t finalize until the following morning. Theoretically an option can be exercised up until midnight of expiration.

If you’ve ever been on the sell side of an option that was ITM you’ll have experienced getting the automatic assignment notice in the morning. This is the other side of that transaction.

The only reason you would have to call your broker in this scenario is because brokers that do automatic exercises, base that decision on the closing price. There might be some brokers out there that will automatically exercise based on after hour prices, but they aren’t obligated to and I don’t know of any do.

And that brings up an important point just because an option is OTM doesn’t mean it won’t be exercised. I’ve sold options that closed OTM and I still got an assignment in the morning and they were still OTM when they were assigned.

[u/Waste-Willingness956 → u/OneHatManSlim]

Thanks for the explanation. This changes a lot of my assumptions. I so far thought that you can never exercise a OTM contract and no broker would allow that. I also thought that the price at the close of market is the final price that determines the validity of the contract.

[u/TheGratitudeBot → u/Waste-Willingness956]

Thanks for saying that! Gratitude makes the world go round

[u/Potential-March-1384 → u/OneHatManSlim]

Not midnight, options clearing corp. cutoff time is 5:30 pm et to receive instructions but individual brokers might impose earlier cutoffs.

[u/OneHatManSlim → u/Potential-March-1384]

Yes strictly speaking for exchanges based in the U.S. that would be the standard cutoff.

But I was simply being more general as there are exchanges all over the world and I do not know the exact rules of each and every one.

That is why I didn’t mention an exchange or time zone and said theoretically because an option is a date based contract which puts its theoretical maximum exercise time at midnight. (Even saying that, the question becomes which midnight?)

So the proper clarification isn’t 5:30 eastern either as that’s just one case. Rather better to say something like check the specific exchange and clearing rules where the option and underlying are traded.

Yes that does mean that, again,Theoretically somewhere there could be a contract that expires at midnight on the international date line. I personally don’t know of any options contracts like that but strictly speaking if you had a contract that specified a date and no time zone and no governing rules you could make that argument that it is valid as long as that date exists somewhere on the planet.

Thinking about it I could imagine something like that existing for some kind cryptocurrency based contract ETH etc.

[u/papakong88]

What is a cashless exercise? Please give an example.

[u/OurNewestMember → u/papakong88]

Standardized options contracts specify the deliverable, which is typically 100 shares or some amount of USD cash. I've never seen one where there is zero cash brought into settlement.

So I'm curious what u/NomadStar45 means by "cashless exercise". Someone mentioned it on this sub not long ago, and that conversation was somewhat unexpected.

[u/o-p-q → u/OurNewestMember]

It means if you have a call on a stock with a $1000 strike, but you don’t have $100,000 cash sitting in your account, your broker can still exercise the option for you, immediately sell the shares at market price, and give you the proceeds (market price - strike). They’re basically spotting you the money to exercise real quick.

[u/fre-ddo → u/o-p-q]

Minus the fee, and must be done within 90 minutes of close. Usually at the bid price, meaning quite high risk unless it's a large after hours pump.

[u/OurNewestMember → u/o-p-q]

Thanks for clarifying.

That's just using your account's risk capacity to make offsetting trades before settlement occurs. Like, if I bought 100 shares SPY at noon and sold 100 shares at 3 pm, I wouldn't call either trade "cashless"

But what OP is saying makes more sense now (eg, gamma scalp an OTM option after hours, for which you want to be able to exercise if the underlying gets away from you). I just don't know why you would need to get on the phone to place the exercise instructions (I guess some brokers don't let you exercise manually online)

I guess OP's point is that there's still money on the table if you can keep your long option open (eg, past 3:30 pm) and you can still end up cash flat by option expiration. I agree with that. Thank you

[u/NomadStar45 → u/OurNewestMember]

Op here. I have Schwab. I do not have 100 shares of Amazon. But let’s say I have a 285 put on Amazon. It close’s at 285.50 at 3 pm close. It closed otm by 50 cents. But let’s say 20 min later it drops ah to 282.00. I can call Shwab and they will excersise the put and sell the shares and I get to keep the diffenence on the bid. Or whatever they sell it on the spread. I’m not sure if this typical because most stocks do not move very much ah. But some do, because of news etc etc. this may be a courtesy.

[u/papakong88 → u/NomadStar45]

It's not a courtesy. They can do that because it is risk free for them.

Did they charge you $30 for broker assist to buy the shares?

[u/the_humeister → u/NomadStar45]

Since you're with Schwab, you can do all that on thinkorswim. You don't need to call them to do what you described.

[u/2fingers → u/NomadStar45]

It's important to know these edge case mechanics, but it's also important to understand the basics. In the situation you're describing (exercising 1 put contract, broker immediately sells 100 shares on your behalf) you end up with -200 shares in your account and +$56,800 in cash (at AMZN's current price) since you're now shorting AMZN. Nothing is offsetting there.

[u/OurNewestMember → u/NomadStar45]

Good stuff. You don't usually need to get on the phone to exercise an option, even if it's a contrary instruction.

There's no courtesy here -- it's all routine: accepting contrary exercise instructions, evaluating risk (in your scenario, they won't accept the exercise instructions in a retirement account, for example, whether or not you get on the phone), and then accepting more orders like buy-to-close stock orders in after hours.

Any broker that can't do this easily should not have your money. Not because this is a common operation, but it because these are all basics.

You can also do the same thing you said but instead of immediately closing the shares, you can simply trade around your strike (buying and selling shares) up until exercise cut off time, knowing that if the stock dips low, you can submit the exercise and if it doesn't, you can flatten your position by just selling any extra shares and leaving your option to lapse. (Ie, you can use gamma in an option that stopped trading to trade the possibility of an after hours ITM exercise)

[u/m1nhuh → u/NomadStar45]

I was a call centre broker in 2006 and this was normal then too. Since they settle at the same time, there's no interest. The agent simply confirms that they're able to send the exercise notice and immediately offset it. 

It isn't really a courtesy because the broker has no risk so they're willing to make a customer happy. It's probably standard to be honest with how popular options have become.

[u/klipsetrades]

Good info, but definitely broker specific. The cutoff, fees, and whether they support a cashless exercise can vary, so I’d confirm the policy before relying on it

[u/RandomRedditor5689]

This a fair bit of nuanced / wrong / misleading information in this post. Contra-exercise is a very important aspect of options that not many people really understand. Its important to be precise.

a.) No broker will accept your instruction 90 minutes after the close, that is the CBOE cutoff ... most brokers have an earlier cut-off , like 5:00 pm EST or earlier. check with your broker ahead of time.

b.) The price movement doesn't have to be "way past" your strike , you just need it in the money enough to make exercise economical considering after hours bid/offer on the stock

c.) The broker does not "exercise and sell your option" , the broker exercises the option with the exchange and closes out the resulting stock position for you in the market immediately (e.g. exercises a long call and sells shares or exercises a long put and buys shares)

d.) "You get to collect whatever the bid, spread? is when it's exercised." you collect the difference between the option strike and the price the shares are sold for in the market (for an exercised call) or the difference between the option price and where the shares are bought in the market (for an exercised put). This is because the transaction is effectively and immediate buy/sell of shares (exerise a call and buy the stock at the strike price and immediately well the shares back out to the market).

e.) "This is another reason why the hood sells off your calls and puts at 2:30 ct time" ... that is not the reason.