Mastering Your Options: The Mechanics of Exercising and Settlement Risks

Exercising an option is a strategic decision that bridges the gap between a derivative contract and actual stock ownership. However, the process involves precise timing rules and market risks that go beyond simple profitability.
Here is the essential guide to how we validate, execute, and settle your exercise requests.

1. The Golden Rule: Action Required
Option exercise is not automatic. Whether you are exercising early or on expiration day, you must actively submit an Exercise Instruction. Without your request, no action is taken, and unexercised options may expire worthless.

2. Timing is Everything: The 16:00 ET Cut-off

• Submit Before 16:00 ET (13:00 ET for half-day market): Processed based on today's market close.
• Submit After 16:00 ET (13:00 ET for half-day market): Queued for the next trading day's close, provided that such day falls on or before the option’s expiration date.
• Note: 

Cancellation: Requests may be cancelled only while in "To be sent" status; cancellation is not permitted once the status becomes "Open."

Expiration Day: On the date of expiration, the cut-off time for exercise requests is earlier than market close. At that time, the Expiration Day Protocol will be triggered for any positions for which no instructions were received.

3. The "In-the-Money" Validation (Crucial Rule)
When we process your request after market close, we perform a strict validation check. It is vital to understand which price dictates success.
The Snapshot Rule: Closing Price Only
We validate your option against the Regular Market Closing Price (typically 4:00 PM ET).

• Call Options: Closing Price − Strike Price ≥ $0.01 (i.e., the user can buy the underlying stock at a price at least $0.01 below the closing price).
• Put Options: Strike Price − Closing Price ≥ $0.01 (i.e., the user can sell the underlying stock at a price at least $0.01 above the closing price).

Ignoring the After-Hours Noise
Important: Price movements in the After-Hours Market do NOT affect the validation result.

• Example: You hold a Call with a Strike of $100. The stock closes at $101 (ITM). At 4:05 PM, bad news hits, and the price drops to $98 in after-hours trading.
• Result: Your exercise SUCCEEDS because the official closing price was $101. The subsequent drop does not cancel the execution.

4. The Settlement Lag: Understanding Market Risk
Exercising involves a time lag between the Validation (at market close) and the actual Stock Delivery.
"Validation is static, but the market is dynamic."
Even if your exercise is successful based on the Closing Price, you will receive the underlying stock after the market has closed. By the time the stock lands in your account:

• Price Change: The market price may have moved significantly (as seen in after-hours trading).
• Exposure: You now own the stock (or a short position) and are fully exposed to this new price level.
• No "Do-Over": You cannot reverse the exercise because the price moved against you after 16:00 ET.

5. Financial Impact: Check Your Account
Beyond market risk, be aware of the capital impact.

• Margin Loan: Exercising a Call without full cash triggers a margin loan, accruing interest.
• Short Position: Exercising a Put without owning the stock creates a Short Position, incurring borrowing fees.
• Action: Always check your account status immediately post-settlement to manage these risks.

6. Expiration Day Protocol
If you do not submit a request and do not close your position on expiration day, we will initiate a Forced Liquidation before market close to prevent expiration risks.
Summary Checklist

• Be Proactive: Manually submit your exercise request.
• Watch the Clock: Submit before 16:00 ET for same-day processing.
• Stay ITM: Exercise only succeeds if the option is at least $0.01 In-the-Money.
• Check Your Funds: Be aware that exercising may trigger Margin Loans or Short Positions. Monitor your account immediately after success.
• Don't Wait: Unattended positions on expiration day face Forced Liquidation.