16. Do All Options Get Exercised?

No, not all options get exercised. Only in-the-money (ITM) options — those that would result in a profit if exercised — are typically exercised, either manually or automatically by the exchange at expiry.

Options that are at the money (ATM) or out of the money (OTM) do not get exercised, as exercising them would lead to no benefit or even a loss. These contracts expire worthless.

What Does It Mean to "Exercise" an Option?

To exercise an option means to use the right that the option provides:

For a call option, exercising allows the holder to buy the underlying asset at the strike price
For a put option, exercising allows the holder to sell the underlying asset at the strike price

However, most options are not exercised manually. They are either closed before expiry (by selling or buying back the option), or, in the case of ITM options, automatically exercised by the exchange at expiry.

Scenarios at Expiry

Let’s understand the three types of option moneyness and what typically happens at expiry:

Moneyness Type	Definition	Will It Be Exercised?	Outcome
In the Money (ITM)	The option has intrinsic value	Yes (automatically)	Settled in favor of holder
At the Money (ATM)	Spot price equals strike price	No	Expires worthless
Out of the Money (OTM)	The option has no intrinsic value	No	Expires worthless

Only in-the-money options are exercised. All other options are simply allowed to lapse without any action from the trader.

What Happens to Options at Expiry in India?

In India, the NSE Clearing Corporation handles expiry settlements.

ITM options are automatically exercised
Settlement is typically cash-settled based on the difference between the strike price and the spot price
OTM and ATM options expire worthless — no settlement or payout happens

You don’t need to manually inform the exchange to exercise your ITM options — the system does it by default.

Example to Illustrate

Suppose you hold the following:

Nifty 50 Call Option
Strike Price: ₹22,000
Expiry: Today
Spot Price at Expiry: ₹22,300
Lot Size: 75

This option is in the money by ₹300.

Profit = ₹300 × 75 = ₹22,500
The position will be automatically exercised and settled in cash
If Nifty expired at ₹21,900, the option would be out of the money and expire worthless

Do Traders Always Wait for Exercise?

No. In reality, most traders do not hold options till expiry. Instead, they:

Square off their options before expiry to lock in gains or cut losses
Trade options for price movement, not to take delivery of the underlying
Use strategies that rely on price movement or volatility (not just final settlement)

Especially in index options like Nifty and Bank Nifty, where physical delivery is not involved, most positions are exited before expiry for better control over profits and losses.

Why OTM and ATM Options Are Not Exercised

OTM options have no intrinsic value. Exercising them would result in a loss, so they are not exercised
ATM options (where strike = spot) also have no gain on exercise, hence no one would exercise them

In both cases, they expire worthless, and the premium paid is lost.

Summary of Option Expiry Outcomes

Option Type	Spot vs Strike	Result	Exercise Status
ITM Call	Spot > Strike	Profit	Exercised (Auto)
ITM Put	Spot < Strike	Profit	Exercised (Auto)
ATM Call/Put	Spot = Strike	No profit	Not exercised
OTM Call	Spot < Strike	Loss	Not exercised
OTM Put	Spot > Strike	Loss	Not exercised

Key Takeaways

Not all options are exercised — only in-the-money options are exercised, typically automatically by the exchange at expiry
Out-of-the-money and at-the-money options expire worthless because they provide no benefit if exercised
Most traders exit their positions before expiry rather than hold them to exercise
In India, options are cash-settled at expiry, and in-the-money options are settled based on the difference between strike and spot
Understanding which options are likely to be exercised helps in managing positions, calculating risk, and planning margin requirements near expiry