The options holder can choose whether or not —
and when — to
exercise,
while the options writer has no control over whether or not a
contract is exercised. That means writers must recognize that
exercise is always possible at any time until the expiration date.
Options holders usually base a decision to exercise
on whether their options are
in
the money,
since
at
the money options would provide no profit, and wouldn't
be worth the transaction fees. And exercising an
out
of the money
option would mean either paying more
than the market price to buy shares, or receiving less than the
market price to sell shares — neither of which would be
financially advantageous.
Anticipating exercise
Options writers can't predict whether their
options positions will be exercised, although it's likely
in the case of an in the money option, and unlikely in the case
of an out of the money option. The only way for an options writer
to be sure of avoiding exercise of an in the money option is to
close out the position by buying the same option sold well before
expiration.
