Automatic exercise occurs because in-the-money short positions are not necessarily exercised by buyers; it is more likely that positions will be closed and profits taken.
So outstanding in-the-money short positions are automatically exercised by the OCC to absorb the disparity between the two sides.
The decision to avoid exercise is made based on current market value as well as the time remaining until expiration.
Many option sellers spend a great deal of time and effort avoiding exercise and trying to also avoid taking losses in open option positions.
A skilled options trader can achieve this by exchanging one option for another, and by timing actions to maximize deteriorating time value while still avoiding exercise.
As long as options remain out of the money, there is no practical risk of exercise.
But once that option goes in the money, sellers have to decide whether to risk exercise with an offsetting transaction.
A word of caution: Selling in-the-money calls can affect how profits are taxed.
If you have owned shares of stock long enough that a sale would be taxed at favorable long-term capital gain rates, selling an in-the-money call might reset the calculation period to zero.
Example: Repetitive Strategies: You bought 100 shares of stock several months ago for $57 per share.
You invested $5,700 plus transaction fees.
Last month, the stock's market value was $62 per share.
At that time, you sold a call with a striking price of 60, and you were paid a premium of 7 ($700).
By expiration, the stock had fallen to $58 per share, and the call expired worthless.
At this point, your adjusted basis in the stock is $50 per share ($57 per share paid at purchase less your profit from selling a call and receiving a premium of $700).
After the call expires, you sell another call with a striking price of 55 and receive 6.
If this option were to be exercised, you would realize an adjusted profit of $1,100 ($500 profit on stock plus $600 profit from selling the call).
If the option's time value declines, you can sell the option and realize the difference as profit.
If the option expires worthless, you can repeat the process a third time, realizing yet more profit, and continue that pattern indefinitely.
The decision to act or to wait depends on the time value involved, and on the proximity of the striking price to the market value of the stock.
As a general rule, the greater the time until expiration, the higher the time value will be; and the closer the striking price is to market value of the stock, the more important the time value becomes, both to buyer and to seller.
For the buyer, time value is a negative, so the higher the time value, the greater the risk.
For the seller, the opposite is true.
Buyers pay the time value (the amount above intrinsic value) as the difference between the stock's current market value and the option's striking price, knowing that this time value will disappear by expiration.
The seller picks options to sell with the same thing in mind, but recognizing that more time value means more potential profit.