# Exercise by Exception: Expiration Instructions and Position Risk

Understand OCC exercise-by-exception, the $0.01 in-the-money threshold, contrary instructions, broker deadlines, and the stock or cash positions expiration can create.

Canonical: https://wiki.fcontext.com/options/exercise-by-exception/
Fact checked: 2026-07-22

> For educational purposes only; not investment advice.

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## Direct answer

**Exercise by exception** (Ex-by-Ex) is OCC's administrative procedure for processing expiring options through clearing members. An expiring option that is in the money by the applicable threshold is exercised unless the clearing member submits contrary instructions. The Options Industry Council states a `$0.01` in-the-money threshold for equity and index options covered by the procedure.

Calling this “automatic exercise” can conceal an important distinction: the OCC threshold is an operational default between OCC and clearing members, not an instruction about what must be economically best for a customer. A holder can request that an option below the threshold be exercised or that one above it not be exercised, subject to the broker's procedures and deadline. Brokers may impose earlier customer cutoffs and may take risk-based action under the account agreement.

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## Closing value, instructions, and resulting positions

For a call, expiration intrinsic value is `max(Sclose − K, 0)`; for a put it is `max(K − Sclose, 0)`. The applicable official closing value, not a later after-hours quote, determines whether the Ex-by-Ex threshold is met. Product rules differ, especially for cash-settled indexes and contracts with special settlement values.

If no contrary instruction changes the default, exercise produces the contract's settlement obligation. A physically settled standard equity call normally requires paying `K × 100` and receiving `100` shares per contract. A physically settled put normally delivers `100` shares for `K × 100`; exercising without owned shares can create a short stock position if the account and broker permit it. Cash-settled products instead generate a cash amount under their specifications.

An option writer does not control whether the holder exercises. Once exercise is assigned through the clearing process, the writer must perform. Long and short legs of a spread are separate contracts: exercise of a long leg and assignment of a short leg can produce stock, cash, margin, or timing exposure rather than a perfectly simultaneous net result.

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## Four cents in the money can create a $5,000 purchase

Suppose one expiring XYZ `$50` call is held and the official closing price is `$50.04`. Its intrinsic value is `$0.04`, above the `$0.01` Ex-by-Ex threshold. Without a contrary instruction, exercise can require `$5,000` to buy `100` shares, even though the option was only four cents in the money.

If after-hours news sends XYZ to `$48.50`, the newly acquired shares are worth `$4,850`, an immediate mark-to-market decline of `$150` from the `$5,000` exercise cost, before the option premium, fees, financing, and any Monday opening gap. The after-hours move does not retroactively change the official closing value used for the threshold, but it may affect whether a timely contrary instruction would be desirable.

Now consider a `$50` put with an official close of `$49.98`. It is two cents in the money and can be exercised by exception. If the holder does not own the deliverable shares, exercise may create a short `100`-share position or may be blocked or managed by the broker. The small intrinsic value does not describe the resulting gross exposure.

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## Expiration-day checklist

- Read the broker's exercise, do-not-exercise, cutoff, liquidation, and insufficient-funds procedures before expiration day.
- Identify the product's exercise style, last trading time, official settlement value, multiplier, and physical or cash settlement.
- Do not assume the public regulatory cutoff is the customer's deadline; the broker can require instructions earlier.
- Calculate shares or cash created per leg and per contract, including adjusted deliverables rather than assuming `100` shares.
- Check buying power, margin, stock-borrow availability, concentration limits, and the account's permission to hold short stock.
- Decide explicitly whether to close, exercise, submit do-not-exercise instructions, or accept expiration processing.
- Confirm the broker received and accepted the instruction; an order ticket or unsent draft is not confirmation.
- Recheck after-hours news and prices while instructions can still be changed under applicable procedures.
- Manage every spread leg; a theoretically limited-risk expiration diagram does not prevent mismatched exercise and assignment.
- Verify the posted stock, cash, exercise, and assignment entries after processing and escalate discrepancies promptly.

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## Common misconceptions

- “Every in-the-money option must be exercised.” The procedure permits contrary instructions and broker risk controls.
- “An option below the threshold cannot be exercised.” A valid affirmative instruction may cause exercise.
- “The broker uses the after-hours price for the threshold.” The rule uses the applicable official closing or settlement value.
- “One cent in the money means only one dollar is at risk.” Exercise can create a `100`-share position and its full overnight exposure.
- “Both spread legs will net automatically.” Exercise, assignment, settlement, and broker processing can differ by leg.
- “Not having enough cash prevents exercise.” The broker may liquidate, restrict, finance, or otherwise handle the resulting position under its agreement; the outcome should not be assumed.

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## Related topics

- [Do-not-exercise instructions](/options/do-not-exercise/)
- [Exercise and assignment](/options/exercise-and-assignment/)
- [Expiration date](/options/expiration-date/)
- [Assignment risk](/options/assignment-risk/)

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## Primary sources

- [Options Industry Council: Options Exercise](https://www.optionseducation.org/referencelibrary/faq/options-exercise)
- [FINRA Rule 2360: Options](https://www.finra.org/finramanual/rules/r2360/)
- [FINRA: Exercise Cut-Off Time for Expiring Options](https://www.finra.org/rules-guidance/notices/information-notice-020321)
- [FINRA: Options](https://www.finra.org/investors/investing/investment-products/options)
- [FINRA: Trading Options—Understanding Assignment](https://www.finra.org/investors/insights/trading-options-understanding-assignment)