E*Trade Options - Do Not Execute without notification

I'm going to have to rethink my relationship with E*Trade Securities. Back in the late 90s, I remember doing options trading with them. It was a Thursday before expiration Friday and Nike was coming out with their earnings report the very next day. I entered my options order very close to the end of the trading day. The options order was accepted and I received a confirmation. The very next morning AFTER Nike reported their earnings, the stock was set the jump. My phone rang. It was E*Trade. They were informing me that the Nike option I had bought did not go through. I told them, but you gave in a confirmation and the option is sitting in my account. I see it right here. They told me that a confirmation is not really a confirmation and the option wasn't mine. I then called my full service broker, I was using one of them at the time also, and told him about it. He said the whole thing sounded fishy to him also.

The market opened and I decided that since the security was in my account, I was going to sell it anyway, and I did. I also got a confirmation on the sell order. However, over that weekend, E*Trade backed out my sell and my buy orders so it was just like I never owned the position.

Now we fast forward over 10 years later. Until this time, anytime I've had an option in the money, the option has exercised. If I didn't have the funds to cover the exercise, I would get a courtesy call informing me of the exercise and giving me 2 options:
1) Wire money to fund the purchase
2) sell the position
3) One time, risk management simply closed my option position 15 minutes before the close without my instruction, but I was ok with that.
(By the way, Fidelity gives me the same options....)

Well, this weekend, I got alerts informing me of my options that expired out of the money, but I never got the alerts of the options that exercised. When I looked in my brokerage account today, I ask, where are my in the money options that expired.

I called E*Trade and was informed that since I didn't the funds to cover the exercise, E*Trade issued a 'do not exercise' instruction without alerts. The most messed up part about this is that I bought these options in the money which means they had instrinsic value, but I lose everything I put into them because of the 'do not exercise' instruction. So for now, I'm sour with E*Trade once again.

I first had a full service broker, that was charging enourmous fees, then I opened up a Fidelity account because they were a dicount broker. Later I opened up an E*Trade account because they offered $25 trades which was super cheap back then. However, now Fidelity offers $7.95 trades against E*Trades $9.95 trades (I'm a Power E*Trade customer, but I guess that doesn't mean squat!)

And then I remember the time, I had a put option on a particular stock that exercised. That put in me in a short position with the stock. E*Trade politely called me and said that had a put option that exercised and it put me in a short position with a stock. Since that particular stock wasn't shortable, I had to close out my short position immediately. Now, if at any time, E*Trade had the ability to do this 'do not exercise' instruction, it seems like that would have done it in that case and I would have been ok with it back then.

The whole 'do not execute' options sounds shady to me. I asked the representative, what if I had a put option on some stocks in my portfolio. If the put option expired in the money, could I ask for a 'do not execute' on the option. He said I could and I would get to keep my stocks!?!?!!! And then I wonder what happened to person I had my call options against. Were their stocks still called away from them and if so where did they go? Also, how do they determine which lucky person doesn't get their stocks called away from them if they write call options and that expire in the money?

Maybe this is all my fault. Back in 1996, I swore off the options market after losing my shirt, only to return 10 years later. I'm on the verge of swearing it off again. I have made intoxicating amounts of money in the options market and have turned around and lost intoxicating amounts of money in the options market.

One thing I remember from the good chat room on America Online about options:
With options, you can lose your shirt with no rags left, with options at least you have the rags.
With stocks time works with you, with options time works against you
With stocks if the stocks doesn't move much, you don't lose much, with options even if the stock moves your way, you can still lose everything.

Addendum: I just checked with 888-options and here is their take on my situation:

Q: In order to exercise a put or call, do I have to have cash or stock in my account to buy (in the case of a call) or sell (in the case of a put) the shares of stock that underlie the contract?

A: One way to answer your question is to ask yourself, "Which provides the highest price/lowest cost - exercising the rights of the option contract OR selling the contract back into the marketplace?"

If you exercise an option, the settlement will be in three business days, just like if you bought or sold stock on an exchange. So for example if you exercised a call and simultaneously sold the equivalent shares of stock, those transactions would offset each other. Assuming the option is in the money there should be no need to post margin for such a set of offsetting transactions. Of course, you will want to check with your brokerage firm to ensure that you are both on the same page regarding this practice.

Apparently, E*Trade is not on the same page in this case. However, in the past this has never been a problem. I guess it's a how they feel at the time situation. One thing is for sure, it will NEVER happen again! Fool me once, shame on you....Fool me twice shame on me!