It is my understanding that you, as the holder of the option, can, indeed, choose not to exercise an ITM Call or Put but you have to let your broker know prior to expiry that that is your desire. If you do not tell your broker NOT to exercise, the OCC will automatically exercise the option. I've never bothered, I just sell the option.
I spoke to IB just recently as I am thinking about reopening an IRA account there, and to the best of my recollection they said the only option trade they would not allow in a cash account was the naked short Call.
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