Definition
Automatic exercise is the default procedure by which an options clearinghouse exercises an option that finishes in the money at expiration, even if the holder gives no instruction. In the United States, the Options Clearing Corporation applies this rule to options that close at or above a small threshold in the money.
The mechanism exists so that valuable contracts are not abandoned. Without it, an inattentive holder could let an in-the-money option expire worthless and forfeit real value.
Why it matters
How it works
At expiration, the clearinghouse compares the settlement price of the underlying to each option's strike. Contracts that are in the money beyond the threshold are exercised; out-of-the-money contracts expire worthless. A holder who does not want the resulting stock position, perhaps to avoid a margin call over the weekend, must file a do-not-exercise notice before the broker's cutoff. Many traders avoid the issue entirely by closing positions before the final bell.