The word exercise by exclusion refers to this automated practice of in-the-money options during expiration time. The Options Clearing Corporation (OCC) institutes practice by exclusion unless explicit directions prohibit exercising the option.
Also called automatic exerciseby exclusion is just a process supervised by the OCC to the ease of draining members. When an option is set to perish in-the-money by $0.01 or longer, the OCC will mechanically exercise that option unless guidelines out of the broker or also the ruler of the option asks differently. The practice protects the holder of this option out of losing the inherent value of this contract.
The OCC employs the purchase price of the underlying security before or at 4:01:30 p.m. Eastern Time to the day before expiry to specify whether the option is in-the-money. This is going to be the previous price occurring during ordinary trading hours to your own security.