Exercise by Exception Decision (EED)

EEDs – Exercise by Exception Decisions.
Let’s say a drug company’s stock is trading at $20/share. We will assume this for the entire blog post.

If you owned the “15 call,” then your call would automatically be exercised. The Options Clearing Corporation (OCC) automatically exercises “In the money” options. Who wouldn’t want to buy a stock for $15 – at the very least he or she can turn around and sell it for $5.

An option is a contract. It is a contract between the buyer and seller. For a “call,” the buyer has the right to buy stock for a certain price specified by the contract, and the seller must sell the stock to the buyer if the buyer wants to. The owner of the call may decide to take advantage of his option, even when it would not seem logical to: if the option is “out of the money”

You have a “25 call.” This means you have the “option” to buy the stock for $25. But you can buy it for $20 – so why would you ever buy it for $25? The “25 call” is “out of the money” it will “expire worthless,” as it should.

The stock market closes at 3:30CST. Let’s say at 4:00, the FDA approves the company’s drug for widespread use! You know this means that the stock will open at $30 on Monday – and shoot to $40 within the first hour.

Now, buying the stock for $25 seems like a good deal (you can’t buy it for the closing price of $20 because the stock market is closed). The stock you bought for $25 will shoot to $40, a $15 profit.

You want to take advantage (“exercise”) your option, and it will not be done automatically. Thus, you will submit an “Exercise by Exception Decision” (EED) to your firm. Your firm will thus exercise your position, leaving you with stock

DNED – Do Not Exercise Decision
Now, you own the “15 call,” then it would automatically be exercised, you don’t need to do anything. You will be buying the stock $15 when everyone else is buying it for $20.

This time, the FDA says “this drug kills people. No way are we putting this out. Go do a year of research.” This stock is about to shoot down! If you buy the stock using your option, you will lose money as the stock you bought for $15 shoots to $5 by Monday at lunch.

You will submit a Do Not Exercise Decision (DNED) to your firm. You will not want to exercise your “in the money” position, because you know that a buying stock for $15 is too high.

People need get their EEDs and DNEDs in by 4:30CST. After 4:30 CST it is against the rules to submit an EED. Our system spits out a handful of “late submission” warnings. I go through these and match up firm’s emails they sent us, to make sure they got the EED in on time (a 4:29 email won’t be processed on the floor till 4:31 for example).
If the FDA makes their announcement at 5:00CST, it’s too late. 4:30 is the cut off for an EED.