Selling Covered Calls, will online broker sell shares automatically?

Question

Let's say I own a share of a company at $100, and I sell a call option for this company for $5 with a 6 month expiration, and a strike price of $110 (all arbitrary numbers). If the share price rises to $120 and the option is exercised, will my share automatically be sold to the owner of the option? How does this transaction play out?

If I bought the stock and sold the call option through an online broker, would the broker automatically sell my share of the company? Or would the broker automatically try to buy a share at market and then sell it?

Answer 1

Equity options are American style so the owner of a call has the right to exercise it at any time. If the stock rises significantly above $110, you may be assigned early and your shares will be sold. This is somewhat more likely if there is a pending dividend and the ITM short call has no time premium remaining.

The Options Clearing Corporation will automatically exercise any option that is $0.01 or more in-the-money at expiration ("exercise by exception") unless the owner designates to his broker that he does not want his long option exercised. This might occur if a call is barely ITM and the salvageable time premium is less than the commission (this does not apply to your example).

With your stock at $120 at expiration, kiss it good-bye and the following Monday, you will have $110 per share in your account (you received the $5 premium when you sold the covered call).