SIE practice questionhardOptions — Exercise and Settlement
An investor holds 1 XYZ Sep 40 call. At expiration, XYZ is trading at $43. If the OCC auto-exercises this option, the investor will:
- AReceive 100 shares at no cost
- BBuy 100 shares of XYZ at $40 per share✓ Correct answer
- CSell 100 shares of XYZ at $40 per share
- DReceive $300 in cash
Explanation
Why B — Buy 100 shares of XYZ at $40 per share
When a call is exercised, the holder buys 100 shares at the strike price ($40). The OCC automatically exercises options that are in-the-money by $0.01 or more at expiration (unless the holder instructs otherwise). The investor pays $4,000 for shares worth $4,300 in the market, creating a $300 gain (before considering the original premium paid). Equity options settle via physical delivery of shares.
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