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Auto-exercise threshold

The amount in the money at which a contract is automatically exercised at expiration; typically one cent, though brokers may set their own.

The clearing standard is $0.01 in the money. Individual brokers often apply stricter rules, declining to exercise where the client lacks the cash, or exercising anything with intrinsic value regardless of size.

The lesson is to know your broker's policy rather than the industry default, and to close cheap long options rather than let expiration decide. Selling a $0.02 option for $2 is better than being handed a stock position worth $5,000.

Example: XYZ closes at $50.005. Under a one-cent rule the $50 call is not exercised. At $50.01 it is. Half a cent decides whether you wake up flat or long 100 shares — which is why traders flatten near-the-money longs before the close rather than testing the rule.

Related: exercise-by-exception, occ, pin-risk, expiration-date

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How an option's time value decaysA curve sliding gently downward at first and then dropping steeply into expiry, where it reaches zero.Extrinsic (time) value6420906030Value bleeds away slowly at firstDecay speeds up hereWorth nothing at expiryexpiryDays to expiry
Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.

Educational only, not advice. Spotted an error? Post in Site Feedback.