option assignment meaning

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What Is an Option Assignment?

Definition and Examples of Assignment

How does assignment work, what it means for individual investors.

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An option assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. Let’s explain what that means in more detail.

Key Takeaways

• An assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. 
• If you sell an option and get assigned, you have to fulfill the transaction outlined in the option.
• You can only get assigned if you sell options, not if you buy them.
• Assignment is relatively rare, with only 7% of options ultimately getting assigned.

An assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. Let’s explain what that means in more detail.

When you sell an option to someone, you’re selling them the right to make you engage in a future transaction. For example, if you sell someone a put option , you’re promising to buy a stock at a set price any time between when the transaction happens and the expiration date of the option.

If the holder of the option doesn’t do anything with the option by the expiration date, the option expires. However, if they decide that they want to go through with the transaction, they will exercise the option. 

If the holder of an option chooses to exercise it, the seller will receive a notification, called an assignment, letting them know that the option holder is exercising their right to complete the transaction. The seller is legally obligated to fulfill the terms of the options contract.

For example, if you sell a call option on XYZ with a strike price of $40 and the buyer chooses to exercise the option, you’ll be assigned the obligation to fulfill that contract. You’ll have to buy 100 shares of XYZ at whatever the market price is, or take the shares from your own portfolio and sell them to the option holder for $40 each.

Options traders only have to worry about assignment if they sell options contracts. Those who buy options don’t have to worry about assignment because in this case, they have the power to exercise a contract, or choose not to.

The options market is huge, in that options are traded on large exchanges and you likely do not know who you’re buying contracts from or selling them to. It’s not like you sell an option to someone you know and they send you an email if they choose to exercise the contract, rather it is an organized process.

In the U.S., the Options Clearing Corporation (OCC), which is considered the options industry clearinghouse, helps to facilitate the exchange of options contracts. It guarantees a fair process of option assignments, ensuring that the obligations in the contract are fulfilled.

When an investor chooses to exercise a contract, the OCC randomly assigns the obligation to someone who sold the option being exercised. For example, if 100 people sold XYZ calls with a strike of $40, and one of those options gets exercised, the OCC will randomly assign that obligation to one of the 100 sellers.

In general, assignments are uncommon. About 7% of options get exercised, with the remaining 93% expiring. Assignment also tends to grow more common as the expiration date nears.

If you are assigned the obligation to fulfill an options contract you sold, it means you have to accept the related loss and fulfill the contract. Usually, your broker will handle the transaction on your behalf automatically.

If you’re an individual investor, you only have to worry about assignment if you’re involved in selling options. Even then, assignments aren't incredibly common. Less than 7% of options get assigned and they tend to get assigned as the option’s expiration date gets closer.

Having an option assigned does mean that you are forced to lock in a loss on an option, which can hurt. However, if you’re truly worried about assignment, you can plan to close your position at some point before the expiration date or use options strategies that don’t involve selling options that could get exercised.

The Options Industry Council. " Options Assignment FAQ: How Can I Tell When I Will Be Assigned? " Accessed Oct. 18, 2021.

Options Assignment: Navigating the Rights and Obligations

By Tyler Corvin

Ever been blindsided by an unexpected traffic ticket in the mail? 

You knew driving came with its set of potential consequences, yet you took to the road regardless. Suddenly, you’re left with a tangible obligation to pay. This unforeseen shift, where what was once a mere possibility becomes an immediate reality, captures the spirit of options assignment within the vast realm of options trading.

Diving into the details, option assignment serves as the bridge between the abstract realm of rights and the concrete world of duties in this field. It’s that unassuming piece in the machinery that can, without warning, change the entire game – often carrying notable financial repercussions. In a domain where every move has implications, truly grasping option assignment is foundational, ensuring not just survival but genuine success.

Join us in this comprehensive exploration of option assignment, arming traders of all experience levels with the knowledge to sail these intricate seas with assuredness and accuracy.

What you’ll learn

What is Options Assignment?

How options assignment works, identifying option assignment , examples of option assignment, managing and mitigating assignment risks, what option assignment means for individual traders.

• Conclusion 

Dive into the realm of options trading and you’ll find a tapestry of processes and potential. “Options assignment” is one pivotal cog in this intricate machine. To a newcomer, this term might seem a tad daunting. But a step-by-step walk-through can demystify its core.

In its simplest form, options assignment means carrying out the rights specified in an option contract. Holding an option allows a trader the choice to buy or sell a particular asset, but there’s no compulsion. The moment they opt to use this right, that’s when options assignment kicks in.

Think of it this way: You’ve got a ticket (option) to a show (buy or sell an asset). You decide if and when to attend. When you make the move, that transition is the options assignment.

There are two main types of option assignments:

• Call Option Assignment : Triggered when a call option holder exercises their right. The seller of the option then steps into the spotlight, bound to sell the asset at the agreed-upon price.
• Put Option Assignment : Conversely, if a put option holder steps forward, the seller of the put takes the stage. Their role? To buy the asset at the specified rate.

To truly grasp options assignment, one must understand the dance between rights and obligations in options trading.

When a trader buys an option, they’re essentially reserving a right, a possible move. On the other hand, selling an option translates to accepting a duty if the option’s holder chooses to play their card.

Rights with Call Options: Buying a call option grants you a special privilege. You can procure the underlying asset at a set price before the option expires. If you choose to exercise this right, the one who sold you the call gets assigned. Their task? Handing over the asset at that set price.

Obligations with Put Options: Securing a put option empowers you to sell the underlying at a pre-decided rate. Should you exercise this, the put’s seller steps up, committed to buying the asset at the given rate.

Several factors steer the course of options assignment, including intrinsic value, looming expiration dates, and current market vibes. To stay ahead of these influences, many traders utilize option trade alerts for timely insights. And remember, while many options might find buyers, not all see execution. Hence, not every seller will get assigned. For traders, understanding this rhythm is vital, shaping many strategies in options trading. 

In the multifaceted world of options trading, discerning option assignment straddles the line between art and science. While no technique guarantees surefire results, several pointers and signals can wave a flag, hinting at an impending assignment.

In-the-Money Options : A robust sign of a looming assignment is the option’s stance relative to its strike price. “In-the-money” refers to an option’s moneyness , and plays a pivotal role in the behavior of option holders. Deeply in-the-money (ITM) options amplify the odds of assignment. An ITM call option, where the market price of the asset towers above the strike price, encourages the holder to exercise and swiftly offload the asset on the market. Conversely, an ITM put option, where the market price trails significantly behind the strike price, incentivizes the holder to scoop up the asset in the market and then exercise the option to vend it at the loftier strike price.

Expiration’s Shadow: The ticking clock of an expiring option raises the assignment stakes, especially if it remains ITM. Many traders make their move just before the eleventh hour to capitalize on their gains.

Dividend Dates in Focus: Call options inching toward expiry ahead of a dividend date, especially if they’re ITM, stand at an elevated assignment crosshair. Option aficionados might play their call options to pocket the dividend, which they’d bag if they possess the core shares.

Extrinsic Value’s Decline : A diminishing time or extrinsic value of an option elevates its exercise odds. When intrinsic value dominates an option’s worth, a holder might be inclined to cash in on this value.

Volume & Open Interest Dynamics : A sudden surge in trading or a dip in open interest can be telltale signs. Understanding volume’s role is crucial as such fluctuations might hint at traders either hopping in or out, suggesting possible exercises and assignments. 

Navigating the Post-Assignment Terrain

Grasping the ripple effects of option assignment is vital, highlighting the immediate responsibilities and potential paths for both the buyer and seller.

For the Option Seller:

• Call Option Assignment : For a trader who’s sold a call option, assignment means they’re on the hook to hand over the underlying shares at the strike price. If they’re short on shares, a market purchase is in order—potentially at a loss if market prices overshoot the strike.
• Put Option Assignment: Assignment on a peddled put option necessitates the trader to buy the shares at the strike price . If this price overshadows the market rate, losses loom.

For the Option Buyer:

• Call Option Play : Exercising a call lets the buyer snap up shares at the strike price. They can either nestle with them or trade them off.
• Put Option Play: Exercising a put gives the buyer the reins to sell their shares at the strike price. This play often pays off when the market rate is dwarfed by the strike, ensuring a tidy profit on the dispensed shares.

Post-assignment, all involved must be on their toes, knowing what triggers margin calls , especially if caught off-guard by the assignment. Tax implications may also hover, influenced by the trade’s nature and the tenure of the position.

Being savvy about these subtleties and gearing up for possible turns of events can drastically refine one’s journey through the options trading maze. 

Call Option Assignment Scenario

Imagine an investor purchases an Nvidia ( NVDA ) call option at a strike price of $435, hoping that the price of the stock will ascend after finding out that they may be forced to move out of some countries . The option is set to expire in a month. Soon after, not only did NVDA rebound from the news, but they reported very strong quarterly earnings, propelling the stock to $455.

Spotting the favorable trend, the investor opts to wield their right to purchase the stock at the agreed strike price of $435, despite its $455 market value. This initiates the option assignment.

The other investor, having sold the option, must now part with their NVDA shares at $435 apiece. If they’re short on stocks, they’d have to fetch them at the going rate of $455 and let them go at a deficit. The first investor, however, stands at a crossroads: retain the shares in hopes of further gains or swiftly trade them at $455, reaping a neat sum. 

Put Option Assignment Scenario

Let’s visualize an investor who speculates a dip in the share price of V.F. Corporation ( VFC ) after seeing news about an activist investor causing shares to jump almost 14% in a day . To hedge their bets, they secures a put option from another investor at a strike price of $18.50, set to lapse in a month.

Fast forward a week, let’s say VFC divulges lackluster quarterly figures, causing the stock to dive to $10. The first investor, seizing the moment, employs their put option, electing to sell their shares at the $18.50 strike price.

When the assignment bell tolls, the other investor finds himself bound to buy the shares from the first investor at the agreed $18.50, a rate that overshadows the current $10 market value. The first investor thus sidesteps the market slump, securing a favorable sale. The other investor, however, absorbs a loss, acquiring stocks at a premium to their market worth.

The realm of options trading is akin to navigating a dynamic river, demanding a sharp comprehension of the risks that lie beneath its surface. A predominant risk that traders often encounter is assignment risk. When one assumes the role of an option seller, they inherit the duty to honor the contract if the buyer opts to exercise. Grasping the gravity of this can make the difference, underscoring the necessity of adept risk management.

A savvy approach to temper assignment risk is by keeping a vigilant eye on the extrinsic value of options. Generally, options rich in extrinsic value tend to resist early assignment. This resistance emerges as the extrinsic value dwindles when the option dives deeper in-the-money, thereby tempting the holder to exercise.

Furthermore, economic currents, ranging from niche corporate updates to sweeping market tides, can be triggers for option assignments. Staying attuned to these economic ripples equips traders with the vision needed to either tweak or maintain their positions. For example, traders may opt to sidestep selling options that are deeply in-the-money, given their higher susceptibility to assignments due to their shrinking extrinsic value.

Incorporating spread tactics, like vertical spreads  or iron condors, furnishes an added shield. These strategies can dampen the risk of assignment since one part of the spread frequently balances the risk of its counterpart. Should the specter of a short option assignment hover, traders might contemplate ‘rolling out’ their stance. This move entails repurchasing the short option and subsequently selling another, possibly at a varied strike rate or a more distant expiry.

Yet, despite these protective layers, it remains pivotal for traders to brace for possible assignments. Maintaining ample liquidity, be it in capital or necessary shares, can avert unfavorable scenarios like hasty liquidations or stiff margin charges. Engaging regularly with brokers can also shed light, occasionally offering a heads-up on looming assignments.

In conclusion, the bedrock of risk management in options trading is rooted in perpetual learning. As traders hone their craft, their adeptness at forecasting and navigating assignment risks sharpens.

In the intricate world of options trading, option assignments aren’t just nuanced details; they’re pivotal moments with deep-seated implications for individual traders and the health of their portfolios. Beyond the immediate financial aftermath, assignments can reshape trading plans, risk dynamics, and the overarching path of an investor’s journey.

At its core, option assignments can transform a trader’s asset landscape. Consider a trader who’s short on a call option. If they’re assigned, they might be compelled to supply the underlying stock. This can result in a rapid stock outflow from their portfolio or, if they don’t possess the stock, birth a short stock stance. On the flip side, a trader short on a put option who faces assignment may find themselves buying the stock at the strike price, thereby dipping into their cash reserves.

These immediate shifts can generate broader portfolio ripples. An unexpected gain or shedding of stocks can jostle a trader’s asset distribution, veering it off their envisioned path. If, for instance, a trader had charted a particular stock-to-cash distribution or a meticulous diversification blueprint, an option assignment might throw a spanner in the works.

Additionally, assignments can serve as a real-world litmus test for a trader’s risk-handling prowess . A surprise assignment might spark margin calls for those not sufficiently fortified with capital. It stands as a poignant nudge about the essence of ensuring liquidity and safeguarding against the unpredictable whims of the market.

Strategically speaking, recurrent assignments might signal it’s time for traders to recalibrate. Are the options they’re offloading too submerged in-the-money? Have they factored in pivotal market shifts that might heighten early exercise odds? Such reflective moments can pave the way for refining and elevating trading methods. 

In the multifaceted world of options trading, option assignment stands out as both a potential boon and a challenge. Far from being a simple checkbox in the process, its ramifications can mold the contours of a trader’s portfolio and steer long-term tactics. The importance of comprehending and adeptly managing option assignment resonates, whether you’re dipping your toes into options for the first time or weaving through intricate trades with seasoned expertise. 

Furthermore, mastering options trading is about integrating its myriad concepts into a cohesive playbook. Whether it’s differentiating trading strategies like the iron condor from the iron butterfly strategy or delving deep into the nuances of option assignments, each component enriches the narrative of a trader’s odyssey. As markets shift and new hurdles arise, a solid grasp of foundational principles remains an invaluable asset. In this perpetual dance of learning and evolution, may your trading maneuvers always be well-informed, proactive, and adept. 

Understanding Options Assignment: FAQs

What factors influence the likelihood of an option being assigned.

Several factors come into play, including the option’s intrinsic value , the time remaining until expiration, and upcoming dividend announcements. Options that are deep in the money or nearing their expiration date are more likely to be assigned.

Are Some Option Styles More Prone to Assignment than Others?

Absolutely. When considering different option styles , it’s essential to note that American-style options can be exercised at any point before their expiration, which means they face a higher risk of early assignment. In contrast, European-style options can only be exercised at expiration.

How Do Current Market Trends Impact Assignment Risk?

Factors like market volatility, notable price shifts, and external economic happenings can amplify the chances of an option being assigned. For example, an option might be assigned before a company’s ex-dividend date if the expected dividend outweighs the weakening of theta decay .

Can Traders Reverse or Counter the Effects of an Option Assignment?

Once an option has been assigned, it’s set in stone. However, traders can maneuver within the market to balance out the implications of the assignment, such as procuring or selling the underlying asset.

Are There Any Fees Tied to Option Assignments?

Indeed, brokers usually impose a fee for both assignments and exercises. The specific fee can differ depending on the broker, making it essential for traders to understand their brokerage’s charging scheme.

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Option Assignment: What It Is, How to Avoid It, and Examples

• January 3, 2023
• Options and Derivatives

Options assignment is a must-know concept for anyone trading options, especially those selling them. It’s the process by which an option seller can be held to their contract terms — and it has risks.

We’ll go over what you need to know about the mechanics of assignment, why it occurs, and your exposure when selling options.

What is option assignment?

When an option holder decides to exercise their option, they’ll first need to notify their broker. This will trigger a notification of assignment to the writer (seller) of said option and force them to fulfill their side of the trade – be it buying or selling the underlying asset at whatever price is agreed upon.

For instance, let’s say that Dave holds a call option on XYZ stock with a strike price of $50. With XYZ currently trading at $55 a share, Dave decides to exercise his option – meaning he wants to exercise his right to buy 100 shares at $50.

The broker would then randomly assign an option seller – who would then be obligated to sell XYZ stock to Dave at the agreed-upon price of $50 a share.

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Reasons for assignment

At expiration, traders still holding short, in-the-money options often receive an unpleasant surprise – being forced to fulfill the terms of their contract. If you had a short put option, your assignment would mean buying stock – if a call option, you’ll be selling shares.

Though it’s not common, early assignment on options trades is still a possibility. Specifically for illiquid contracts that have wide bid/ask spreads or those with upcoming dividend payments – so best to keep an eye out!

• Expiration: Most likely reason for an assignment. Any short, in-the-money options are nearly guaranteed to be assigned. Most brokers will automatically exercise their customers’ options even if they are just a penny in-the-money.
• Wide spread: For an option holder, exercising early isn’t usually a preferred course of action. However, in certain cases—such as when the bid/ask spread is too wide due to illiquidity—they may have no choice but to exercise if they want to get any value out of their contract.
• Dividend risk: Short, in-the-money (ITM) call options are at risk of being assigned early if the underlying stock pays a dividend. This risk is greatest when the dividend amount is higher than the extrinsic value left in the contract.

How to avoid option assignment

If you’re the writer (seller) of an option, a guaranteed way to avoid assignment is by closing out the option contract. If you no longer hold it, there’s no risk someone will assign it to you.

Another way to avoid assignment is by rolling your option. This means you would close out the current contract and open a new one at an expiry further in time or with a strike further out-of-the-money. It could take some practice, but it’s worth understanding if you want more control over how your options are managed!

• OTM expiration: Out-of-the-money options will expire worthless upon expiration. An option holder has up to 90 minutes after market close to exercise – so it’s best to close the option prior to the bell to avoid any surprise assignments.
• Rolling: Rolling an option is the process of closing your current position while simultaneously opening a new one. If the option is about to expire, you would be buying back the current option while simultaneously selling a new one further out in time. You could also choose to move it to a new strike and improve the probabilities.
• Exit the trade: One surefire way you can avoid getting assigned is by closing your option. That’ll make it impossible for anyone to assign a contract to you!

Does option assignment count as a day trade?

In general, a day trade is defined as the opening and closing of a security on the same trading day. However, the exercise or assignment of an option contract does not count as a day trade.

What is dividend risk ?

Dividend risk is only a consideration for short, in-the-money call options on an underlying which pays dividends . It’s most likely to occur on the ex-dividend date for the stock on options with less extrinsic value left than the dividend being paid.

Most traders would find the extrinsic value left in the call option by using the value of the corresponding put. In the example below, let’s assume the stock goes ex-dividend tomorrow and pays a 26-cent dividend.

If we had sold the 18-strike call, using the put we can quickly see it has roughly 7 cents of extrinsic value. Since the dividend is higher than the extrinsic value, this option is at high risk of being assigned early.

Any in-the-money call option that has less extrinsic value than the amount of the dividend, may be at risk of early assignment. This could be avoided by exiting the option prior to the ex-dividend date, or by rolling the option to an expiration or strike less likely to be assigned.

Options assignment is a potential risk of options writing. In many situations, it can be avoided but needs to be fully understood to manage effectively.

By understanding the basics of options assignment, why it happens, and ways to avoid it; you can rest easy knowing that you’re prepared for anything. So next time option assignment comes knocking, you’ll be ready!

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Exercising your options

Managing an options trade is quite different from that of a stock trade. Essentially, there are 4 things you can do if you own options: hold them, exercise them, roll the contract, or let them expire. If you sell options, you can also be assigned.

If you are an active investor trading options with some percentage of your overall investment funds, here’s how you can evaluate the available choices for an options trade.

Holding your options

During the life of an options contract you’ve purchased, you can simply hold them (i.e., take no action). Suppose you own call options (which grant the right, but not the obligation, to buy a specified amount of an underlying stock at a specified strike price up and until a specified expiration date) and you believe the underlying stock price will rise within the time remaining until expiration. In this scenario, you would hold the option so that they increase in value over time.

The primary objective of this approach is potential appreciation of the option (based on the underlying stock rising and/or an increase in expected volatility for the underlying stock using our example of buying a call), in addition to delaying additional cost of buying the stock or any tax implications after you exercise the options.

To exercise an option means to take action on the right to buy or sell the underlying position in an options contract at the predetermined strike price, at or before expiration. The order to exercise your options depends on the position you have. For example, if you bought to open call options, you would exercise the same call options by contacting your brokerage company and giving your instructions to exercise the call options (to buy the underlying stock at the strike price).

There are a variety of reasons why you might choose to exercise options before they expire (assuming they are in the money, which means they have value). In addition to wanting to capture realized gains on your options, you may want to exercise:

Be aware that closing out an options position triggers a taxable event, so you would want to consider the tax implications and the timing of closing a trade on your specific situation. You should consult your tax advisor if you have additional questions.

In sum, there are many scenarios that might cause you to want to exercise your options before expiration, and they depend primarily on your outlook for the underlying stock and your objectives/risk constraints.

Employee stock plan options

There are additional choices you can make when exercising employee stock plan options . 1  These include:

• Exercise-and-hold (cash-for-stock)
• Exercise-and-sell-to-cover
• Exercise-and-sell

Rolling your options

Before expiration—and, more commonly, near the end of the contract—you can also choose to roll the contract. This involves closing out your existing options position (by selling to close a long position or buying to close a short position) that is about to expire and simultaneously purchasing a substantially similar options position, only with a later expiration date. You might want to roll out your position if you want to have the same options exposure after your contract is set to expire.

In a covered call position, for example, you can also roll up, roll down, or roll out. This involves closing out your existing short options position that is about to expire, and simultaneously selling another options position, typically with a later expiration date. While there are differences among these choices, the objective is the same: to obtain similar exposure to an existing position.

If you sell an option, you have an obligation to sell stock if you are short a call, and an obligation to buy stock if you are short a put. The owner of call or put options has the right to assign the contract to the seller. This is known as assignment.

Assignment occurs when the buyer exercises an options contract on or before expiration, and the seller must fulfill the obligation by either buying or selling the underlying security at the exercise price. As a seller of options, you can be assigned at any time prior to expiration regardless of the underlying share price—meaning you might have to receive or deliver shares of the underlying stock.

Depending on your position, settlement can occur in a variety of ways. If you are assigned on a covered call, for example, the shares you own will be sold automatically.

Let the options expire

Remember, options have an expiration date. They either have intrinsic value (for calls, the stock is above the strike price, and for puts, the stock is below the strike price) or they will expire worthless. If the options have intrinsic value, you should plan to exercise at or before expiration, or anticipate having it automatically exercised at expiration if in the money. If they do not have intrinsic value, you can simply let your options expire. Of course, letting options expire can also have tax consequences.

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Option Assignment Process

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One of the biggest fears that new options traders have is that they may get assigned. The option assignment process means that the option writer is obligated to deliver on the terms specified in a contract.

For example, if a put option is assigned, the options writer would need to buy the underlying security at the strike price dictated in the contract.

Likewise for a call option, the options write would need to sell the underlying security at the strike price dictated in the contract.

As an options trader you’re usually seeking to make a profit from directional bets or to hedge your portfolio.

You’re rarely, if ever, looking to actually buy or sell the underlying security so being assigned can sound like a scary prospect.

This article will explore the option assignment process so you can understand how it works and how you can prevent yourself getting stuck with buying or selling an underlying security.

When Assignment Occurs

Assignment occurs when an option holder exercises an option. Exercising an option simply means that the option holder executes the terms in the options contract.

So for example if you are holding a call option, you have the right, but not the obligation to buy the underlying security at the agreed strike price.

When you exercise the option, the option holder will need to sell the underlying security at the agreed strike price and for the agreed quantity.

If you’re dealing with European style options, you will know when expiration is possible because they can only be exercised on the expiration date itself.

For American style options, which is what most people trade, options can be exercised at any time before the expiration date.

This means that if you are an options writer of American style options, you could theoretically be asked at any time to comply with the terms of the contract.

Unfortunately, there is no knowing when an assignment will take place.

However, generally options are not exercised prior to expiration as it is usually much more profitable to sell the option instead.

It’s worth noting that this will only happen to you if you’re an options seller. Option buyers can never be assigned.

There are two key steps to assignment and to make it fair, the process of selecting who is assigned is random.

In the first step, the Options Clearing Corporation (OCC) will issue an exercise notice to a randomly selected Clearing Member who maintains an account with the OCC.

In the second step, the Clearing Member then assigns the exercise notice to an individual account.

When You Are Most At Risk

There are several situations that can dramatically increase the risk that you will be assigned:

Situation 1: Your option is In The Money (ITM)

When an option is ITM, an option holder would stand to profit if they exercised the option.

The deeper the option is ITM, the greater the profit for the option holder and therefore the higher risk they may exercise the option and you will be assigned.

Situation 2: The option has an upcoming dividend

An ITM call buyer can profit from exercising an option before its ex-dividend date if the extrinsic value of the call is less than the amount of the dividend.

Situation 3: There is no extrinsic value left

If there is no extrinsic value left, an option buyer could be tempted to exercise the option.

If there is extrinsic value, an option buyer would typically make a bigger profit by selling the option and buying/selling shares of the underlying asset.

How You Can Avoid The Risk Of Being Assigned

There are several steps you can take to avoid, or at the very least minimise, your risk of being assigned.

The first step to consider is avoiding selling any options that have an upcoming dividend.

Before selling any option, first check that the underlying security doesn’t have an upcoming dividend and if it does, consider waiting until after the dividend has occurred (i.e. the stock has gone ex-dividend).

If you do end up selling an option with an upcoming dividend, then the second step to protecting yourself is to close your position early as your risk begins to increase.

For example, if you are short an option with an extrinsic value less than the dividend amount and the ex-dividend of the underlying security is not too far away, close your position.

Otherwise you risk being assigned and being forced to pay the dividend as well!

To completely avoid early assignment risk, you could always sell only European style options which are cash settled at expiration. You can read more that here and here .

The final way to manage your risk is to close positions well before expiration date approaches.

As the time left to expiration decreases, so too does the extrinsic value. For option buyers, it means they could stand to benefit and so there is a risk they may exercise the option.

While this article deals with the process and risks behind being assigned, there will be times when this isn’t an issue for you.

Provided you have enough capital to meet the assignment, you may be fine with being assigned.

If this is the case, you would simply have a new stock position added which you could hold onto or immediately liquidate.

In the event that you don’t have enough capital, your broker will issue you with a margin call and the position should be automatically closed.

As the process of assignment can differ between brokers, its best you contact your broker to check the specific process they use when issuing assignments to individual accounts.

In general, provided you take a few key steps to mitigate your risks, particularly around dividend issuing securities, the chances of assignment are very low.

Trade safe!

Disclaimer: The information above is for  educational purposes only and should not be treated as investment advice . The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Closed my Oct BB (a few moments ago) for 34% profit…that is the best of the 3 BBs I traded since Gav taught us the strategy…so, the next coffee or beer on me, Gav 🙂

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Assignment in Options Trading

Introduction articles, what is an options assignment.

In options trading , an assignment occurs when an option is exercised.   

As we know, a buyer of an option has the right but not the obligation to buy or sell an underlying asset depending on what option they have purchased. When the buyer exercises this right, the seller will be assigned and will have to deliver or take delivery of what they are contractually obliged to. For stock options, it is typically 1 , 000 shares per contract for the UK ; and 100 shares per contract in the US.   

As you can see, a buyer will never be assigned, only the seller is at risk of assignment. The buyer, however, may be auto exercised if the option expires in-the-money .

The Mechanics of Assignment

Assignment of options isn’t a random process. It’s a methodical procedure that follows specific steps, typically beginning with the option holder’s decision to exercise their option. The decision then gets routed through various intermediaries like brokers and clearing +houses before the seller is notified.

• Exercise by Holder: The holder (buyer) of the option exercises their right to buy (for Call ) or sell (for Put ).
• Random Assignment by a Clearing House: A clearing house assigns the obligation randomly among all sellers of the option.
• Fulfilment by the Writer: The writer (seller) now must fulfill the obligation to sell (for Call) or buy (for Put) the underlying asset.

Option Assignments: Calls and Puts

Call option assignments.

When a call option holder chooses to exercise their right, the seller of the call option gets assigned. In such a situation, the seller is obligated to sell the underlying asset at the strike price to the call option holder.

Put Option Assignments

Similarly, if a put option holder decides to exercise their right, the put option seller gets assigned. The seller is then obligated to buy the underlying asset at the strike price from the put option holder.

The Implications of Assignments for Options Traders

Understanding assignment in options trading is crucial as it comes with potential risks and rewards for both parties involved.

For Option Sellers

Option sellers, or ‘writers,’ face the risk of unexpected assignments. The risk of being assigned early is especially present for options that are in the money or near their expiration date. We explain the difference between American and European assignments below.

For Option Holders

For option holders, deciding when to exercise an option (potentially leading to assignment) is a strategic decision. This decision must consider factors such as the intrinsic value of the option, the time value, and the dividend payment of the underlying asset.

Can Options be assigned before expiration?

In short, Yes, but it depends on the style of options you are trading. 

American Style – Yes, this type of option can be assigned on or before expiry. 

European Style – No, this type of option can only be assigned on the expiry date as defined in the contract specifications.

Options Assignment Example

For example, an investor buys XYZ PLC 400 call when the stock is trading at 385. The stock in the coming weeks rises to 425 after some good news, the buyer then decides to exercise their right early to buy the XYZ PLC stock at 400.  

In this scenario, the call seller (writer) has been assigned and will have to deliver stock at 400 to the buyer (sell their stock at 400 when the prevailing market is 425).   

An option typically would only be assigned if it is in the money, considering factors like dividends which do play an important role in exercise/assignments.

Can an Options Assignment be Prevented?

Assignment can sometimes come as a bit of a surprise but normally you should see it coming. You can only work to prevent assignment by closing the option before expiry or before any possible risk of assignment.

Managing Risks in Options Trading

While options trading can offer high returns, it is not devoid of risks. Therefore, understanding and managing these risks is key.  

Buyers Risk: The premium paid for an option is at risk. If the option is not profitable at expiration, the premium is lost.  

Writers Risk: The writer takes on a much larger risk. If a call option is assigned, they must sell the underlying asset at the strike price, even if its market price is higher.

Options Assignment Summary

The concept of ‘assignment’ in options trading, although complex, is a cornerstone of understanding options trading. It not only clarifies the responsibilities of an options seller but also helps the traders to gauge and manage their risks more effectively. Successful trading involves not just knowing your options but also understanding your obligations.

Options Assignment FAQs

What is options assignment.

Options assignment refers to the process by which the seller (writer) of an options contract is obligated to fulfill their contractual obligation to buy or sell the underlying asset, as specified by the terms of the options contract.

When does options assignment occur?

Options assignment can occur when the buyer of the options contract exercises their right to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset before or at expiration .

How does options assignment work?

When a buyer exercises their options contract, a clearing house randomly assigns a seller who is short (has written) the same options contract to fulfill the obligations of the exercise.

What happens to the seller upon options assignment?

If assigned, the seller (writer) of the options contract is obligated to fulfill their contractual obligation by buying or selling the underlying asset at the specified price (strike price) per the terms of the options contract.

Can options be assigned before expiration?

Yes, options can be assigned at any time (depending on contract type) before expiration if the buyer chooses to exercise their right. However, it is more common for options to be assigned closer to expiration as the time value diminishes.

What factors determine options assignment?

Options assignment is determined by the buyer’s decision to exercise their options contract. They may choose to exercise if the options contract is in-the- money and it is financially advantageous for them to do so.

How can I avoid options assignment? 

As a seller (writer) of options contracts, you can avoid assignment by closing your position before expiration through a closing trade (buying back the options contract) or rolling it over to a future expiration date.

What happens if I am assigned on a short call option?

If assigned on a short call option, you are obligated to sell the underlying asset at the specified price (strike price). This means you would need to deliver the shares . To fulfill this obligation, you may need to buy the shares in the open market if you do not hold them .

What happens if I am assigned on a short put option?

If assigned on a short put option, you are obligated to buy the underlying asset at the specified price (strike price). This means you would need to purchase the shares .  

How does options assignment affect my account?

Options assignment can impact your account by requiring you to fulfill the obligations of the assigned options contract, which may involve buying or selling the underlying asset. It is important to have sufficient funds or margin available to cover these obligations.

OptionsDesk Tips & Considerations

You should always have enough funds in your account to cover any assignment risk. If you have a short call position and it is in-the-money at the time of an ex-dividend be aware of extra assignment risk here as buyer/holder of the option may look to exercise to qualify for the dividend. Assignments can happen at any time!

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Important information : Derivative products are considerably higher risk and more complex than more conventional investments, come with a high risk of losing money rapidly due to leverage and are not, therefore, suitable for everyone. Our website offers information about trading in derivative products, but not personal advice. If you’re not sure whether trading in derivative products is right for you, you should contact an independent financial adviser. For more information, please read our Important Derivative Product Trading Notes .

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What is Options Assignment & How to Avoid It

If you are learning about options, assignment might seem like a scary topic. In this article, you will learn why it really isn’t. I will break down the entire options assignment process step by step and show you when you might be assigned, how to minimize the risk of being assigned, and what to do if you are assigned.

Video Breakdown of Options Assignment

Check out the following video in which I explain everything you need to know about assignment:

What is Assignment?

To understand assignment, we must first remember what options allow you to do. So let’s start with a brief recap:

• A call option gives its buyer the right to buy 100 shares of the underlying at the strike price
• A put option gives its buyer the right to sell 100 shares of the underlying at the strike price

In other words, call options allow you to call away shares of the underlying from someone else, whereas a put option allows you to put shares in someone else’s account. Hence the name call and put option.

The assignment process is the selection of the other party of this transaction. So the person that has to buy from or sell to the option buyer that exercised their option.

Note that an option buyer has the right to exercise their option. It is not an obligation and therefore, a buyer of an option can never be assigned. Only option sellers can ever be get assigned since they agree to fulfill this obligation when they sell an option.

Let’s go through a specific example to clarify this:

• The underlying security is stock ABC and it is trading at $100.
• Peter decides to buy 1 put option with a strike price of 95 as a hedge for his long stock position in ABC
• Kate sells this exact same option at the same time.

Over the next few weeks, ABC’s price goes down to $90 and Peter decides to exercise his put option. This means that he uses his right to sell 100 shares of ABC for $95 per share. Now Kate is assigned these 100 shares of ABC which means she is obligated to buy them for $95 per share. 

Peter now has 100 fewer shares of ABC in his portfolio, whereas Kate has 100 more.

This process is analog for a call option with the only difference being that Kate would be short 100 shares and Peter would have 100 additional shares of ABC in his portfolio.

Hopefully, this example clarifies what assignment is.

Who Can Be Assigned?

To answer this question, we must first ask ourselves who exercises their option? To do this, let’s quickly look at the different ways that you can close a long option position:

• Sell the option: Selling an option is probably the easiest way to close a long option position. Doing this will have no effect on the option seller.
• Let the option expire: If the option is Out of The Money , it would expire worthless and there would be no consequence for the option seller. If, on the other hand, the option is In The Money by more than $0.01, it would typically be automatically exercised . This would start the options assignment process.
• Exercise the option early: The last possibility would be to exercise the option before its expiration date. This, however, can only be done if the option is an American-style option. This would, once again, lead to an option assignment.

So as an option seller, you only have to worry about the last two possibilities in which the buyer’s option is exercised. 

But before you worry too much, here is a quick fact about the distribution of these 3 alternatives:

Less than 10% of all options are exercised.

This means 90% of all options are either sold prior to the expiration date or expire worthless. So always remember this statistic before breaking your head over the risk of being assigned.

It is very easy to avoid the first case of being assigned. To avoid it, just close your short option positions before they expire (ITM). For the second case, however, things aren’t as straight forward.

Who Risks being Assigned Early?

Firstly, you have to be trading American-style options. European-style options can only be exercised on their expiration date. But most equity options are American-style anyway. So unless you are trading index options or other kinds of European-style options, this will be the case for you.

Secondly, you need to be an options seller. Option buyers can’t be assigned.

These two are necessary conditions for you to be assigned. Everyone who fulfills both of these conditions risks getting assigned early. The size of this risk, however, varies depending on your position. Here are a few things that can dramatically increase your assignment risk:

• ITM: If your option is ITM, the chance of being assigned is much higher than if it isn’t. From the standpoint of an option buyer, it does not make sense to exercise an option that isn’t ITM because this would lead to a loss. Nevertheless, it is possible. The deeper ITM the option is, the higher the assignment risk becomes.
• Dividends : Besides that, selling options on securities with upcoming dividends also increases your risk of assignment. More specifically, if the extrinsic value of an ITM call option is less than the amount of the dividend, option buyers can achieve a profit by exercising their option before the ex-dividend date. 
• Extrinsic Value: Otherwise, keep an eye on the extrinsic value of your option. If the option has extrinsic value left, it doesn’t make sense for the option buyer to exercise their option because they would achieve a higher profit if they just sold the option and then bought or sold shares of the underlying asset. Typically, the less time an option has left, the lower its extrinsic value becomes. Implied volatility is another factor that influences extrinsic value.
• Puts vs Calls: This is more of an interesting side note than actual advice, but put options tend to get exercised more often than call options. This makes sense since put options give their buyer the right to sell the underlying asset and can, therefore, be a very useful hedge for long stock positions.

How can you Minimize Assignment Risk?

Since you now know what assignment is, and who risks being assigned, let’s shift our focus on how to minimize the assignment risk. Even though it isn’t possible to completely remove the risk of being assigned, there are things that you can do to dramatically decrease the chances of being assigned.

The first thing would be to avoid selling options on securities with upcoming dividend payments. Before putting on a position, simply check if the underlying security has any upcoming dividend payments. If so, look for a different trade.

If you ever are in the position that you are short an option and the ex-dividend of the underlying security is right around the corner, compare the size of the dividend to the extrinsic value of your option. If the extrinsic value is less than the dividend amount, you really should consider closing the position. Otherwise, the chances of being assigned are high. This is especially bad since being short during a dividend payment of a security will force you to pay the dividend.

Besides avoiding dividends, you should also close your option positions early. The less time an option has left, the lower its extrinsic value becomes and the more it makes sense for option buyers to exercise their options. Therefore, it is good practice to close your (ITM) short option positions at least one week before the expiration date.

The deeper an option is ITM, the higher the chances of assignment become. So the just-mentioned rule is even more important for deep ITM options.

If you don’t want to indefinitely close your position, it is also possible to roll it out to a later expiration cycle. This will give you more time and add extrinsic value to your position.

FAQs about Assignment

Last but not least, I want to answer some frequently asked questions about options exercise and assignment.

1. What happens if your account does not have enough buying power to cover the assigned position?

This is a common worry for beginning options traders. But don’t worry, if you don’t have enough capital to cover the new position, you will receive a margin call and usually, your broker will just automatically close the assigned shares immediately. This might lead to a minor assignment fee, but otherwise, it won’t significantly affect your account. Tatsyworks, for example, charges an assignment fee of only $5.

Check out my review of tastyworks

2. How does assignment affect your P&L?

When an option is exercised, the option holder gains the difference between the strike price and the price of the underlying asset. If the option is ITM, this is exactly the intrinsic value of the option. This means that the option holder loses the extrinsic value when he exercises his/her option. That’s also why it doesn’t make sense to exercise options with a lot of extrinsic value left.

This means that as soon as the option is exercised, it is only the intrinsic value that is relevant for the payoff. This is the same payoff as the option at its expiration date.

So as an options seller, your P&L isn’t negatively affected by an assignment. Either it stays the same or it becomes slightly better due to the extrinsic value being ignored.

As an example, if your option is ITM by $1, you will lose up to $100 per option or $1 per share that you are assigned. But this does not account for the extrinsic value that falls away with the exercise of the option. So this would be the same P&L as at expiration. Depending on how much premium you collected when selling the option, this might still be a profit or a minor loss.

With that being said, as soon as you are assigned, you will have some carrying risk. If you don’t or can’t close the position immediately, you will be exposed to the ongoing price fluctuations of that security.  Sometimes, you might not be able to close the new position immediately because of trading halts, or because the market is closed.

If you weren’t planning on holding that security, it is a good idea to close the new position as soon as possible. 

Option spreads such as vertical spreads, add protection to these price fluctuations since you can just exercise the long option to close the assigned share position at the strike price of the long option.

3. When an option holder exercises their option, how is the assignment partner chosen?

This is usually a random process. As soon as an option is exercised, the responsible brokerage firm sends a request to the Options Clearing Corporation (OCC). They send back the requested shares, whereafter they randomly choose another brokerage firm that currently has a client that is short the exercised option. Then the chosen broker has to decide which of their clients is assigned. This choice is, once again, random or a time-based priority system is used.

4. How does assignment work for index options?

As there aren’t any shares of indexes, you can’t directly be assigned any shares of the underlying asset. Therefore, index options are cash-settled. This means that instead of having to buy or sell shares of the underlying, you simply have to pay the difference between the strike price and the underlying trading price. This makes assignment easier and a lot less likely among index options.

Note that ETF options such as SPY options are not cash-settled. SPY is a normal security with openly traded shares, so exercise and assignment work just like they do among equity options.

I hope this article made you realize that assignment isn’t as bad as it might seem at first. It is just important to understand how the options assignment process works and what affects the likelihood of being assigned.

To recap, here’s what you should to do when you are assigned:

if you have enough capital in your account to cover the position, you could either treat the new position as a normal (stock) position and hold on to it or you could close it immediately. If you don’t have a clear trading plan for the new position, I recommend the latter.

If, on the other hand, you don’t have enough buying power, you will receive a margin call from your broker and the position should be closed automatically.

Assignment does not have any significant impact on your P&L, but it comes with some carrying risk. Options spreads can offer more protection against this than naked option positions.

To mitigate assignment risk, you should close option positions early, always keep an eye on the extrinsic value of your option positions, and avoid upcoming dividend securities.

And always remember, less than 10% of options are exercised, so assignment really doesn’t happen that often, especially not if you are actively trying to avoid it.

For the specifics of how assignment is handled, it is a good idea to contact your broker, as the procedures can vary from broker to broker.

Thank you for taking the time and reading this post. If you have any questions, comments, or feedback, please let me know in the comment section below.

22 Replies to “What is Options Assignment & How to Avoid It”

hi there well seems like finally there is one good honest place. seem like you are puting on the table the whole truth about bad positions. however my wuestion is when can one know where to put that line of limit. when do you recognise or understand that you are in a bad position? thanks and once again, a great site.

Well If you are trading a risk defined strategy the point would be at max loss and not too much time left until expiration. For undefined risk strategies however it can be very different. I would just say if you don’t have too much time until expiration and are far from making money you should use some common sense and admit that you are wrong.

What would happen in the event of a crash. Would brokers be assigning, options, cashing out these shares, and making others bankrupt. Well, I guessed I sort of answered my own question. Its not easy to understand, especially not knowing when this would come up. But seems like you hit the important aspects of the agreement.

Actually I wouldn’t imagine that too many people would want to exercise their options in case of a market ctash, because they probably wouldn’t want to hold stocks in this risky and volatile environment. 

And to the part of the questions: making others bankrupt. This really depends on the situation. You can’t get assigned more stock than your option covers. This means as long as you trade with reasonable position sizing nothing too bad can happen. Otherwise I would recommend to trade with defined risk strategies so your maximum drawdown is capped.

Thanks for writing about assignment Louis. After reading the section how assignment works, I feel I am somewhat unclear about how assignment works when the exerciser exercises Put or Call option. In both cases, if the underlying is an index, is the settlement done through the margin account money? Would you be able to provide a little more detail of how exercising the option (Put vs Call) would work in case of an underlying stock vs Index.

Thank you very much in advance

Thanks for the question. Indexes can’t be traded in the same way as stocks can. That’s why index options are settled in cash. If your index option is assigned, you won’t have to buy or sell any shares of the underlying index at the strike price because there exist no shares of indexes. Instead, you have to pay the amount that your index option is ITM to the exerciser of your option. Let me give you an example: You are short a call option with the strike price of 1000. The underlying asset is an index and it’s price is 1050. This means your call option is 50 points ITM. If someone exercises your long call option, you will have to pay him/her the difference between the strike price and the underlying’s price which would be 50 (1050-1000). So the main difference between index and stock options is that you don’t have to buy/sell any shares of the underlying asset for index options. I hope this helps. Please let me know if you have any other questions or comments.

Can the same logic be applied for ETFs as it does Indexes? For example, if I trade the SPY ETF, would it be settled in cash?

Thanks! Johnson

Hi Johnson, Exercise and assignment for ETFs such as SPY work just like they do for equities. ETFs have shares that are openly traded, whereas indexes don’t. That’s why indexes are settled in cash, whereas ETFs aren’t. I hope this helps.

There are many articles online that I read that are biased against options tradings and I am a bit surprised to read a really helpful article like this. I find this helpful in understanding options trading, what are the techniques and how to manage the risks. Before, I was hesitant to try this financial game but now, after reading this article, I am considering participating with live accounts and no longer with a demo account. A few months ago, I signed up with a company called IQ Options, but really never involved real money and practiced only with a demo account.

Thanks for your comment. I am glad to see that you liked the post. However, I don’t recommend sing IQ Option to trade since they are a very shady trading firm. You could check out my  Review of IQ Option for all the details.

this is a great and amazing article. i sincerely your effort creating time  to write on such an informative article which has taught me a lot more on what is options assignment and avoiding it. i just started trading but had no ideas on this as a beginner. i find this article very helpful because it has given me more understanding on options trading and knowing the techniques and how to manage the risks. thanks for sharing this amazing article

You are very welcome

Hello, the first thing that i noticed when i opened this page is the beauty of the website. i am sure you have put much effort into creating this article and the details are really clear here. after watching the video break down, i fully understood the entire process on how to avoid options assignment.

Thank you so much for the positive feedback!

I would love to create a website like yours as the design used is really nice, simple and brings about clarity of the write ups, but then you wrote a brilliant article on how to avoid options assignment. great video here. it was  confusing at first. i will suggest another video be added to help some people like me.

Thanks for the feedback. I recommend checking out my  options trading beginner course . In it, I cover all the basics that weren’t explained here.

Thanks for your very helpful article. I am contemplating selling a call that would cover half my shares on company X. How can ensure that the assignment process selects the shares that I bought at a higher price, so as to maximize capital losses?

Hi Luis, When you are assigned, you just automatically buy/sell shares of the underlying at the strike price. This means your overall portfolio is adjusted by these 100 shares. The exact shares and your entry price are irrelevant. If you have 50 shares of X and your short call is assigned, you will sell 100 shares of X at the strike price. After this, your position would be -50 shares of X which would be equivalent to being short 50 shares of X. I hope this helps.

Louis, I entered a CALL butterfly spread at $100 below where I intended, just 2 days before expiration date. I intended to speculate on a big earning announcement jump the next day. It was a debit of 1.25. Also, when I realized my mistake, I tried to close it for anything at all. The Mark fluctuated between 40 and 70, but I could not get it to close. So now I am assigned to sell 200 share at 70 dollars below the market price of the stock. I am having a heart attack. I do not have the 200 shares to deliver, so it seems I have to buy them at the market, and sell them for $70 less, for a loss of $14,000.

What other options are open to me? Can my trading firm force a close with a friendly market maker and make it as if it happened on Friday? I am willing to pay a friendly market maker several hundred dollars to make this trade. Is that an option? Other options the trading firm can do for me that would cost me less than $14,000?

Hi Paul, Thanks for your comment. From the limited information provided, it is hard to say what is actually going on. If you bought a call butterfly spread, your max loss should be limited to the premium you paid to open the position. An assignment shouldn’t have a huge impact on your overall P&L. I highly recommend contacting your broker and explaining your situation to them since they have all the information required to evaluate what’s actually going on. But if the loss is real, there is no way for you to make a deal with a market maker to limit or undo potential losses. I hope this helps.

What happens with ITM long call option that typically gets automatically exercised at expiration, if the owner of the call option doesn’t have the cash/margin to cover the stock purchase?

He would receive a margin call

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Assignment: Definition in Finance, How It Works, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is an Assignment?

Assignment most often refers to one of two definitions in the financial world:

• The transfer of an individual's rights or property to another person or business. This concept exists in a variety of business transactions and is often spelled out contractually.
• In trading, assignment occurs when an option contract is exercised. The owner of the contract exercises the contract and assigns the option writer to an obligation to complete the requirements of the contract.

Key Takeaways

• Assignment is a transfer of rights or property from one party to another.
• Options assignments occur when option buyers exercise their rights to a position in a security.
• Other examples of assignments can be found in wages, mortgages, and leases.

Uses For Assignments

Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, or other asset of value. to another entity through a written agreement.

Assignment rights happen every day in many different situations. A payee, like a utility or a merchant, assigns the right to collect payment from a written check to a bank. A merchant can assign the funds from a line of credit to a manufacturing third party that makes a product that the merchant will eventually sell. A trademark owner can transfer, sell, or give another person interest in the trademark or logo. A homeowner who sells their house assigns the deed to the new buyer.

To be effective, an assignment must involve parties with legal capacity, consideration, consent, and legality of the object.

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans, or other obligations. Money is automatically subtracted from a worker's paycheck without consent if they have a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms.

A final example involves a lease assignment. This benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease, taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through an assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy . Any rental income would then be paid directly to the lender.

Options Assignment

Options can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price . The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer's rights. This is known as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option ) or buy (if a put option ) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away . For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Suppose a trader owns 100 call options on company ABC's stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.

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The Risks of Options Assignment

Any trader holding a short option position should understand the risks of early assignment. An early assignment occurs when a trader is forced to buy or sell stock when the short option is exercised by the long option holder. Understanding how assignment works can help a trader take steps to reduce their potential losses.

Understanding the basics of assignment

An option gives the owner the right but not the obligation to buy or sell stock at a set price. An assignment forces the short options seller to take action. Here are the main actions that can result from an assignment notice:

• Short call assignment: The option seller must sell shares of the underlying stock at the strike price.
• Short put assignment: The option seller must buy shares of the underlying stock at the strike price.

For traders with long options positions, it's possible to choose to exercise the option, buying or selling according to the contract before it expires. With a long call exercise, shares of the underlying stock are bought at the strike price while a long put exercise results in selling shares of the underlying stock at the strike price.

When a trader might get assigned

There are two components to the price of an option: intrinsic 1 and extrinsic 2  value. In the case of exercising an in-the-money 3 (ITM) long call, a trader would buy the stock at the strike price, which is lower than its prevailing price. In the case of a long put that isn't being used as a hedge for a long stock position, the trader shorts the stock for a price higher than its prevailing price. A trader only captures an ITM option's intrinsic value if they sell the stock (after exercising a long call) or buy the stock (after exercising a long put) immediately upon exercise.

Without taking these actions, a trader takes on the risks associated with holding a long or short stock position. The question of whether a short option might be assigned depends on if there's a perceived benefit to a trader exercising a long option that another trader has short. One way to attempt to gauge if an option could be potentially assigned is to consider the associated dividend. An options seller might be more likely to get assigned on a short call for an upcoming ex-dividend if its time value is less than the dividend. It's more likely to get assigned holding a short put if the time value has mostly decayed or if the put is deep ITM and close to expiration with a wide bid/ask spread on the stock.

It's possible to view this information on the Trade page of the thinkorswim ® trading platform. Review past dividends, the price of the short call, and the price of the put at the call's strike price. While past performance cannot be relied upon to continue, this information can help a trader determine whether assignment is more or less likely.

Reducing the risk associated with assignment

If a trader has a covered call that's ITM and it's assigned, the trader will deliver the long stock out of their account to cover the assignment.

A trader with a call vertical spread 4 where both options are ITM and the ex-dividend date is approaching may want to exercise the long option component before the ex-dividend date to have long stock to deliver against the potential assignment of the short call. The trader could also close the ITM call vertical spread before the ex-dividend date. It might be cheaper to pay the fees to close the trade.

Another scenario is a call vertical spread where the ITM option is short and the out-of-the-money (OTM) option is long. In this case, the trader may consider closing the position or rolling it to a further expiration before the ex-dividend date. This move can possibly help the trader avoid having short stock on the ex-dividend date and being liable for the dividend.

Depending on the situation, a trader long an ITM call might decide it's better to close the trade ahead of the ex-dividend date. On the ex-dividend date, the price of the stock drops by the amount of the dividend. The drop in the stock price offsets what a trader would've earned on the dividend and there would still be fees on top of the price of the put.

Assess the risk

When an option is converted to stock through exercise or assignment, the position's risk profile changes. This change could increase the margin requirements, or subject a trader to a margin call, 5 or both. This can happen at or before expiration during early assignment. The exercise of a long option position can be more likely to trigger a margin call since naked short option trades typically carry substantial margin requirements.

Even with early exercise, a trader can still be assigned on a short option any time prior to the option's expiration.

1  The intrinsic value of an options contract is determined based on whether it's in the money if it were to be exercised immediately. It is a measure of the strike price as compared to the underlying security's market price. For a call option, the strike price should be lower than the underlying's market price to have intrinsic value. For a put option the strike price should be higher than underlying's market price to have intrinsic value.

2  The extrinsic value of an options contract is determined by factors other than the price of the underlying security, such as the dividend rate of the underlying, time remaining on the contract, and the volatility of the underlying. Sometimes it's referred to as the time value or premium value.

3  Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the underlying asset's price is above the strike price. A put option is ITM if the underlying asset's price is below the strike price. For calls, it's any strike lower than the price of the underlying asset. For puts, it's any strike that's higher.

4  The simultaneous purchase of one call option and sale of another call option at a different strike price, in the same underlying, in the same expiration month.

5  A margin call is issued when the account value drops below the maintenance requirements on a security or securities due to a drop in the market value of a security or when buying power is exceeded. Margin calls may be met by depositing funds, selling stock, or depositing securities. A broker may forcibly liquidate all or part of the account without prior notice, regardless of intent to satisfy a margin call, in the interests of both parties.

Just getting started with options?

More from charles schwab.

Today's Options Market Update

Weekly Trader's Outlook

Options Expiration: Definitions, a Checklist, & More

Related topics.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled  Characteristics and Risks of Standardized Options before considering any options transaction. Supporting documentation for any claims or statistical information is available upon request.

With long options, investors may lose 100% of funds invested.

Spread trading must be done in a margin account.

Multiple leg options strategies will involve multiple commissions.

Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Mike Martin

Option exercise and assignment explained w/ visuals.

• Categories: Options Trading

Last updated on February 11th, 2022 , 06:38 am

Buyers of options have the right to exercise their option at or before the option’s expiration. When an option is exercised, the option holder will buy (for exercised calls) or sell (for exercised puts) 100 shares of stock per contract at the option’s strike price.

Conversely, when an option is exercised, a trader who is short the option will be assigned 100 long (for short puts) or short (for short calls) shares per contract.

• Long American style options can exercise their contract at any time.
• Long calls transfer to +100 shares of stock
• Long puts transfer to -100 shares of stock
• Short calls are assigned -100 shares of stock.
• Short puts are assigned +100 shares of stock.
• Options are typically only exercised and thus assigned when extrinsic value is very low.
• Approximately only 7% of options are exercised.

The following sequences summarize exercise and assignment for calls and puts (assuming one option contract ):

Call Buyer Exercises Option   ➜  Purchases 100 shares at the call’s strike price.

Call Seller Assigned  ➜  Sells/shorts 100 shares at the call’s strike price.

Put Buyer Exercises Option  ➜  Sells/shorts 100 shares at the put’s strike price.

Put Seller Assigned   ➜  Purchases 100 shares at the put’s strike price.

Let’s look at some specific examples to drill down on this concept.

New to options trading? Learn the essential concepts of options trading with our FREE 160+ page Options Trading for Beginners PDF.

Exercise and Assignment Examples

In the following table, we’ll examine how various options convert to stock positions for the option buyer and seller:

As you can see, exercise and assignment is pretty straightforward: when an option buyer exercises their option, they purchase (calls) or sell (puts) 100 shares of stock at the strike price . A trader who is short the assigned option is obligated to fulfill the opposite position as the option exerciser. 

Automatic Exercise at Expiration

Another important thing to know about exercise and assignment is that standard in-the-money equity options are automatically exercised at expiration. So, traders may end up with stock positions by letting their options expire in-the-money.

An in-the-money option is defined as any option with at least $0.01 of intrinsic value at expiration . For example, a standard equity call option with a strike price of 100 would be automatically exercised into 100 shares of stock if the stock price is at $100.01 or higher at expiration.

What if You Don't Have Enough Available Capital?

Even if you don’t have enough capital in your account, you can still be assigned or automatically exercised into a stock position. For example, if you only have $10,000 in your account but you let one 500 call expire in-the-money, you’ll be long 100 shares of a $500 stock, which is a $50,000 position. Clearly, the $10,000 in your account isn’t enough to buy $50,000 worth of stock, even on 4:1 margin.

If you find yourself in a situation like this, your brokerage firm will come knocking almost instantaneously. In fact, your brokerage firm will close the position for you if you don’t close the position quickly enough.

Why Options are Rarely Exercised

At this point, you understand the basics of exercise and assignment. Now, let’s dive a little deeper and discuss what an option buyer forfeits when they exercise their option.

When an option is exercised, the option is converted into long or short shares of stock. However, it’s important to note that the option buyer will lose the extrinsic value of the option when they exercise the option. Because of this, options with lots of extrinsic value remaining are unlikely to be exercised. Conversely, options consisting of all intrinsic value and very little extrinsic value are more likely to be exercised.

The following table demonstrates the losses from exercising an option with various amounts of extrinsic value:

As we can see here, exercising options with lots of extrinsic value is not favorable. 

Why? Consider the 95 call trading for $7. Exercising the call would result in an effective purchase price of $102 because shares are bought at $95, but $7 was paid for the right to buy shares at $95. 

With an effective purchase price of $102 and the stock trading for $100, exercising the option results in a loss of $2 per share, or $200 on 100 shares.

Even if the 95 call was previously purchased for less than $7, exercising an option with $2 of extrinsic value will always result in a P/L that’s $200 lower (per contract) than the current P/L. F

or example, if the trader initially purchased the 95 call for $2, their P/L with the option at $7 would be $500 per contract. However, if the trader decided to exercise the 95 call with $2 of extrinsic value, their P/L would drop to +$300 because they just gave up $200 by exercising.

7% Of Options Are Exercised

Because of the fact that traders give up money by exercising an option with extrinsic value, most options are not exercised. In fact, according to the Options Clearing Corporation,  only 7% of options were exercised in 2017 . Of course, this may not factor in all brokerage firms and customer accounts, but it still demonstrates a low exercise rate from a large sample size of trading accounts.

So, in almost all cases, it’s more beneficial to sell the long option and buy or sell shares instead of exercising. We like to call this approach a “synthetic exercise.”

Congrats! You’ve learned the basics of exercise and assignment. If you’d like to know how the exercise and assignment process actually works, continue to the next section!

Who Gets Assigned When an Option is Exercised?

With thousands of traders long and short options in the market, who actually gets assigned when one of the traders exercises their option?

In this section, we’ll run through the exercise and assignment process for options so you know how the assignment decision occurs.

If a trader is short a single option, how do they get assigned if one of a thousand other traders exercises that option?

The short answer is that the process is random. For example, if there are 5,000 traders who are long a call option and 5,000 traders who are short that call option, an account with the short option will be randomly assigned the exercise notice. The random process ensures that the option assignment system is fair

Visualizing Assignment and Exercise

The following visual describes the general process of exercise and assignment:

If you’d like, you can read the OCC’s detailed assignment procedure here  (warning: it’s intense!).

Now you know how the assignment procedure works. In the final section, we’ll discuss how to quickly gauge the likelihood of early assignment on short options.

Assessing Early Option Assignment Risk

The final piece of understanding exercise and assignment is gauging the risk of early assignment on a short option.

As mentioned early, only 7% of options were exercised in 2017 (according to the OCC). So, being assigned on short options is rare, but it does happen. While a specific probability of getting assigned early can’t be determined, there are scenarios in which assignment is more or less likely.

The following scenarios summarize  broad generalizations  of early assignment probabilities in various scenarios:

In regards to the dividend scenario, early assignment on in-the-money short calls with less extrinsic value than the dividend is more likely because the dividend payment covers the loss from the extrinsic value when exercising the option.

All in all, the risk of being assigned early on a short option is typically very low for the reasons discussed in this guide. However, it’s likely that you will be assigned on a short option at some point while trading options (unless you don’t sell options!), but at least now you’ll be prepared!

Next Lesson

Options Trading for Beginners

Intrinsic and Extrinsic Value in Options Trading Explained

Option Greeks Explained: Delta, Gamma, Theta & Vega

Projectfinance options tutorials.

➥ Bullish Strategies

➥ Bearish Strategies

➥ Neutral Strategies

➥ Vertical Spreads Guide

☆ Options Trading for Beginners ☆

➥ Basics of Calls and Puts

➥ What is a Strike Price?

➥ Option Expiration

➥ Intrinsic and Extrinsic Value

➥ Exercise and Assignment

➥ The Bid-Ask Spread

➥ Volume and Open Interest

➥ Option Chain Explained

➥ Option Greeks 101

➥ Delta Explained

➥ Gamma Explained

➥ Theta Explained

➥ Vega Explained

➥ Implied Volatility Basics

➥ What is the VIX Index?

➥ The Expected Move

➥ Trading VIX Options

➥ Trading VIX Futures

➥ The VIX Term Structure

➥ IV Rank vs. IV Percentile

➥ Option ​Order Types 101

➥ Stop-Loss Orders On Options Explained

➥ Stop Limit Order in Options: Examples W/ Visuals

➥ Limit Order in Option Trading Explained w/ Visuals

➥ Market Order in Options: Don’t Throw Away Money!

➥ TIF Orders Types Explained: DAY, GTC, GTD, EXT, GTC-EXT, MOC, LOC

Additional Resources

Exercise and Assignment – CME Group

Learn About Exercise and Assignment – CME Group

About the Author

Chris Butler received his Bachelor’s degree in Finance from DePaul University and has nine years of experience in the financial markets. 

Chris started the projectfinance YouTube channel in 2016, which has accumulated over 25 million views from investors globally.

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Understanding assignment risk in Level 3 and 4 options strategies

E*TRADE from Morgan Stanley

With all options strategies that contain a short option position, an investor or trader needs to keep in mind the consequences of having that option assigned , either at expiration or early (i.e., prior to expiration). Remember that, in principle, with American-style options a short position can be assigned to you at any time. On this page, we’ll run through the results and possible responses for various scenarios where a trader may be left with a short position following an assignment.

Before we look at specifics, here’s an important note about risk related to out-of-the-money options: Normally, you would not receive an assignment on an option that expires out of the money. However, even if a short position appears to be out of the money, it might still be assigned to you if the stock were to move against you just prior to expiration or in extended aftermarket or weekend trading hours. The only way to eliminate this risk is to buy-to-close the short option.

• Short (naked) calls

Credit call spreads

Credit put spreads, debit call spreads, debit put spreads.

• When all legs are in-the-money or all are out-of-the-money at expiration

Another important note : In any case where you close out an options position, the standard contract fee (commission) will be charged unless the trade qualifies for the E*TRADE Dime Buyback Program . There is no contract fee or commission when an option is assigned to you.

Short (naked) call

If you experience an early assignment.

An early assignment is most likely to happen if the call option is deep in the money and the stock’s ex-dividend date is close to the option expiration date.

If your account does not hold the shares needed to cover the obligation, an early assignment would create a short stock position in your account. This may incur borrowing fees and make you responsible for any dividend payments.

Also note that if you hold a short call on a stock that has a dividend payment coming in the near future, you may be responsible for paying the dividend even if you close the position before it expires.

An early assignment generally happens when the put option is deep in the money and the underlying stock does not have an ex-dividend date between the current time and the expiration of the option.

Short call + long call

(The same principles apply to both two-leg and four-leg strategies)

This would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short and simultaneously sell the long leg of the spread.

Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date, because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.

Short put + long put

Early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.

However, the long put still functions to cover the position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously.

Here's a call example

• Let’s say that you’re short a 100 call and long a 110 call on XYZ stock; both legs are in-the-money.
• You receive an assignment notification on your short 100 call, meaning you sell 100 shares of XYZ stock at 100. Now, you have $10,000 in short stock proceeds, your account is short 100 shares of stock, and you still hold the long 110 call.
• Exercise your long 110 call, which would cover the short stock position in your account.
• Or, buy 100 shares of XYZ stock (to cover your short stock position) and sell to close the long 110 call.

Here's a put example:

• Let’s say that you’re short a 105 put and long a 95 put on XYZ stock; the short leg is in-the-money.
• You receive an assignment notification on your short 105 put, meaning you buy 100 shares of XYZ stock at 105. Now, your account has been debited $10,500 for the stock purchase, you hold 100 shares of stock, and you still hold the long 95 put.
• The debit in your account may be subject to margin charges or even a Fed call, but your risk profile has not changed.
• You can sell to close 100 shares of stock and sell to close the long 95 put.

Long call + short call

Debit spreads have the same early assignment risk as credit spreads only if the short leg is in-the-money.

An early assignment would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short share position and simultaneously sell the remaining long leg of the spread.

Long put + short put

An early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.

All spreads that have a short leg

(when all legs are in-the-money or all are out-of-the-money)

Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.

However, the long put still functions to cover the long stock position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously. 

What to read next...

How to buy call options, how to buy put options, potentially protect a stock position against a market drop, looking to expand your financial knowledge.

Options Assignment

How can i tell when i will be assigned.

You can never tell when you will be assigned. Once you sell an American-style option (put or call), you have the potential for assignment to fulfill your obligation to receive (and pay for) or deliver (and are paid for) shares of stock on any business day. In some circumstances, you may be assigned on a short option position while the underlying shares are halted for trading, or perhaps while they are the subjects of a buyout or takeover.

To ensure fairness in the distribution of equity and index option assignments, OCC utilizes a random procedure to assign exercise notices to clearing member accounts maintained with OCC. The assigned firm must then use an exchange-approved method (usually a random process or the first-in, first-out method) to allocate notices to its accounts that are short the options.

Some generalizations might help you understand likelihood of assignment on a short-option position:

• Option holders only exercise about 7% of options. The percentage hasn't varied much over the years. That does not mean that you can only be assigned on 7% of your short option. It means that, in general, option exercises are not that common.
• The majority of option exercises (and the corresponding assignments) occurs as the option gets closer to expiration. It usually doesn't make sense to exercise an option, which has any time premium over intrinsic value. For most options, that doesn't occur until close to expiration.
• In general terms, an investor is more likely to exercise a put that goes in-the-money than a call that goes in-the-money. Why? Think about the result of an exercise. An investor who exercises a put uses it to sell shares and receive cash. A person exercising a call option uses it to buy shares and must pay cash. Option holders are more likely to exercise options if it means they can receive cash sooner. The opposite is true for calls, where exercise means you have to pay cash sooner.

The bottom line is that you really don't have any sure-fire way to predict when you will be assigned on a short option position. It can happen any day the stock market is open for trading.

Could I be assigned if my covered calls are in-the-money?

If i am short a call option (on a covered write) and i buy back my short call, is it possible for..., if i am short a call option (on a covered write) and i buy back my short call, is it possible for me to be assigned (and the stock position to be called away) that night, i sold short 10 options contracts recently. unfortunately, i was assigned early on each contract..., i sold short 10 options contracts recently. unfortunately, i was assigned early on each contract, one at a time. couldn't all the contracts have been assigned at once, are options automatically assigned when they are in-the-money at expiration is there a way that..., are options automatically assigned when they are in-the-money at expiration is there a way that i can avoid assignment.

OCC encourages all investors to inform their brokerage firm of their exercise intentions for their long options at expiration. While each firm may have their own thresholds, OCC employs an administrative procedure where options that are $.01 in-the-money are exercised unless contrary instructions are provided. Customers and brokers should check with their firm's operations department to determine their company's policies regarding exercise thresholds.

An option holder has the right to exercise their option regardless of the price of the underlying security. It is a good practice for all option holders to express their exercise (or non-exercise) instructions to their broker. Is there a magic number that ensures that option writers will not be assigned? No. Although unlikely, an investor may choose to exercise a slightly out-of-the-money option or choose not to exercise an option that is in-the-money by greater than $.01.

Some investors use the saying, "when in doubt, close them out.” This means that if they buy back any short contracts, they are no longer at risk of assignment.

I wrote a slightly out-of-the-money covered call. The call has since moved in-the-money. Is there...

I wrote a slightly out-of-the-money covered call. the call has since moved in-the-money. is there any way to avoid assignment on that short call, if i buy-to-close a short option position, how can i be sure i will not be assigned.

You will want to first check with your broker to ensure that an assignment has not already occurred.

Because OCC processes closing buy transactions before exercises, there is no possibility of being assigned on positions that were closed during that day's trading hours.

When I sell an option to open, is my only chance of assignment (and being required to fulfill my...

When i sell an option to open, is my only chance of assignment (and being required to fulfill my obligations as the option writer) when the person or entity that bought from me decides to exercise.

No. There are several reasons why this is untrue. First, the buy side of your opening sale could have been a closing purchase by someone who was already short the option. Second, OCC allocates assignments randomly. Anyone short that particular option is at risk of assignment when an option holder decides to exercise. Third, assuming the other side of your trade was an opening purchase, they may sell to close at any time but since you are still short, you are at risk of assignment.

As long as you keep a short option position open, you are at risk of assignment. Assignment risk increases as the option becomes deeper in-the-money and as expiration approaches (the option trades with less time premium). Assignment risk also increases just before the ex-dividend date for short calls and just after the ex-dividend date for short puts.

At expiration, OCC exercises all equity options that are in-the-money by $.01 or more unless the option holder instructs their broker not to exercise or the stock has been removed from OCC’s exercise-by-exception processing.

The exchanges recently halted trading on a stock where I’m short puts. Am I still obligated to...

The exchanges recently halted trading on a stock where i’m short puts. am i still obligated to purchase the security if assigned.

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News & Insights

Trading Options: Understanding Assignment

December 14, 2020 — 06:00 am EST

Written by FINRA & OCC Staff ([email protected]) for Finra  ->

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When someone buys options to open a new position (“Buy to Open”), they are buying a right —either the right to buy the underlying security at a specified price (the strike price) in the case of a call option, or the right to sell the underlying security in the case of a put option.

On the flip side, when an individual sells, or writes, an option to open a new position (“Sell to Open”), they are accepting an obligation —either an obligation to sell the underlying security at the strike price in the case of a call option or the obligation to buy that security in the case of a put option. When an individual sells options to open a new position, they are said to be “short” those options. The seller does this in exchange for receiving the option’s premium from the buyer.

American-style options allow the buyer of a contract to exercise at any time during the life of the contract, whereas European-style options can be exercised only during a specified period just prior to expiration. For an investor selling American-style options, one of the risks is that the investor may be called upon at any time during the contract’s term to fulfill its obligations. That is, as long as a short options position remains open, the seller may be subject to “assignment” on any day equity markets are open. 

What is assignment?

An option assignment represents the seller’s obligation to fulfill the terms of the contract by either selling or buying the underlying security at the exercise price. This obligation is triggered when the buyer of an option contract exercises their right to buy or sell the underlying security.

To ensure fairness in the distribution of American-style and European-style option assignments, the Options Clearing Corporation (OCC), which is the options industry clearing house, has an established process to randomly assign exercise notices to firms with an account that has a short option position. Once a firm receives an assignment, it then assigns this notice to one of its customers who has a short option contract of the same series. This short option contract is selected from a pool of such customers, either at random or by some other procedure specific to the brokerage firm. 

How does an investor know if an option position will be assigned?

While an option seller will always have some level of uncertainty, being assigned may be a somewhat predictable event. Only about 7% of options positions are typically exercised, but that does not imply that investors can expect to be assigned on only 7% of their short positions. Investors may have some, all or none of their short positions assigned.

And while the majority of American-style options exercises (and assignments) happen on or near the contract’s expiration, a long options holder can exercise their right at any time, even if the underlying security is halted for trading. Someone may exercise their options early based upon a significant price movement in the underlying security or if shares become difficult to borrow as the result of a pending corporate action such as a buyout or takeover. 

Note: European-style options can only be exercised during a specified period just prior to expiration. In U.S. markets, the majority of options on commodity and index futures are European-style, while options on stocks and exchange-traded funds (ETF) are American-style. So, while SPDR S&P 500, or SPY options, which are options tied to an ETF that tracks the S&P 500, are American-style options, S&P 500 Index options, or SPX options, which are tied to S&P 500 futures contracts, are European-style options.

What happens after an option is assigned?

An investor who is assigned on a short option position is required to meet the terms of the written option contract upon receiving notification of the assignment. In the case of a short equity call, the seller of the option must deliver stock at the strike price and in return receives cash. An investor who doesn’t already own the shares will need to acquire and deliver shares in return for cash in the amount of the strike price, multiplied by 100, since each contract represents 100 shares. In the case of a short equity put, the seller of the option is required to purchase the stock at the strike price.

How might an investor’s account balance fluctuate after opening a short options position?

It is normal to see an account balance fluctuate after opening a short option position. Investors who have questions or concerns or who do not understand reported trade balances and assets valuations should contact their brokerage firm immediately for an explanation. Please keep in mind that short option positions can incur substantial risk in certain situations.

For example, say XYZ stock is trading at $40 and an investor sells 10 contracts for XYZ July 50 calls at $1.00, collecting a premium of $1,000, since each contract represents 100 shares ($1.00 premium x 10 contracts x 100 shares). Consider what happens if XYZ stock increases to $60, the call is exercised by the option holder and the investor is assigned. Should the investor not own the stock, they must now acquire and deliver 1,000 shares of XYZ at a price of $50 per share. Given the current stock price of $60, the investor’s short stock position would result in an unrealized loss of $9,000 (a $10,000 loss from delivering shares $10 below current stock price minus the $1,000 premium collected earlier).

Note: Even if the investor’s short call position had not been assigned, the investor’s account balance in this example would still be negatively affected—at least until the options expire if they are not exercised. The investor’s account position would be updated to reflect the investor’s unrealized loss—what they could lose if an option is exercised (and they are assigned) at the current market price. This update does not represent an actual loss (or gain) until the option is actually exercised and the investor is assigned. 

What happens if an investor opened a multi-leg strategy, but one leg is assigned?

American-style option holders have the right to exercise their options position prior to expiration regardless of whether the options are in-, at- or out-of-the-money. Investors can be assigned if any market participant holding calls or puts of the same series submits an exercise notice to their brokerage firm. When one leg is assigned, subsequent action may be required, which could include closing or adjusting the remaining position to avoid potential capital or margin implications resulting from the assignment. These actions may not be attractive and may result in a loss or a less-than-ideal gain.

If an investor’s short option is assigned, the investor will be required to perform in accordance with their obligation to purchase or deliver the underlying security, regardless of the overall risk of their position when taking into account other options that may be owned as part of the overall multi-leg strategy. If the investor owns an option that serves to limit the risk of the overall spread position, it is up to the investor to exercise that option or to take other action to limit risk. 

Below are a couple of examples that underscore how important it is for every investor to understand the risks associated with potential assignment during market hours and potentially adverse price movements in afterhours trading.

Example #1: An investor is short March 50 XYZ puts and long March 55 XYZ puts. At the close of business on March expiration, XYZ is priced at $56 per share, and both puts are out of the money, which means they have no intrinsic value. However, due to an unexpected news announcement shortly after the closing bell, the price of XYZ drops to $40 in after-hours trading. This could result in an assignment of the short March 50 puts, requiring the investor to purchase shares of XYZ at $50 per share. The investor would have needed to exercise the long March 55 puts in order to realize the gain on the initial multi-leg position. If the investor did not exercise the March 55 puts, those puts may expire and the investor may be exposed to the loss on the XYZ purchase at $50, a $10 per share loss with XYZ now trading at $40 per share, without receiving the benefit of selling XYZ at $55.  Example #2: An investor is short March 50 XYZ puts and long April 50 XYZ puts. At the close of business on March expiration, XYZ is priced at $45 per share, and the investor is assigned XYZ stock at $50. The investor will now own shares of XYZ at $50, along with the April 50 XYZ puts, which may be exercised at the investor’s discretion. If the investor chooses not to exercise the April 50 puts, they will be required to pay for the shares that were assigned to them on the short March 50 XYZ puts until the April 50 puts are exercised or shares are otherwise disposed of.

Note: In either example, the short put position may be assigned prior to expiration at the discretion of the option holder. Investors can check with their brokerage firm regarding their option exercise procedures and cut-off times.

For options-specific questions, you may contact OCC’s Investor Education team at [email protected] , via chat on OptionsEducation.org or subscribe to the OIC newsletter . If you have questions about options trading in your brokerage account, we encourage you to contact your brokerage firm. If after doing so you have not resolved the issue or have additional concerns, you can contact FINRA . Subscribe to FINRA's newsletter for more information about saving and investing.

FINRA is dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org .

Photo Credit: ©iStockphoto.com/da-kuk

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Everything You Need to Know About Options Assignment Risk

By Pat Crawley

The  fear of being assigned early on a short option position is enough to cripple many would-be options traders into sticking by their tried-and-true habit of simply buying puts or calls. After all, theoretically, the counterparty to your short options trade could exercise the option at any time, potentially triggering a Margin Call on your account if you’re undercapitalized.

But in this article, we're going to show you why early assignment is a vastly overblown fear, why it's not the end of the world, and what to do if it does occur.

What is Assignment in Options Trading?

Do you remember reading beginner  options books  or articles that said, "an option gives the buyer the right, but not the obligation, to buy/sell a stock at a specified price and date?" Well, it's accurate, but only for the buy side of the contract.

The seller of an option is actually obligated to buy or sell should the buyer choose to exercise their contract. So when options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

Let's say you sold a call option on a stock with a strike price of $50, which you held until expiration. At expiration, the stock trades at $55, meaning it's automatically exercised by the buyer. In this case, you are forced to sell the buyer 100 shares at $50 per share.

So when selling options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

What is Early Assignment in Options Trading?

Early assignment is when the buyer of an options contract that you're short decides to exercise the option before the expiration and begins the assignment process.

Many beginning traders count early assignments as one of their biggest trading fears. Many traders' fear of early assignment stems from their lack of understanding of the process. Still, it's typically not something to worry about, and we'll show you why in this article. But first, let's look at an example of how the process works.

For instance, say we collect $1 in premium to short a 30-day put option on XYZ with a strike price of $45 while the underlying is trading at $50. Fast forward, and it's the morning of expiration day. Options will expire at the close of trading in a few hours. The underlying stock is hovering around $44.85. Our plan pretty much worked as planned until, for some reason, the holder of the option exercises the option. We're confused and don't know what's going on.

It works exactly the same way as ordinary options settlement . You fulfill your end of the bargain. As the seller of a put option, you sold the right to sell XYZ at $45. The option buyer exercised that right and sold his shares to you at $45 per share.

And now, let's break down what happened in this transaction:

• You collected $1 in premium when opening the contract  
• The buyer of the option exercises his right to sell at $45 per share.  
• You’re now long 100 shares of XYZ that you paid $45 for, and you sell them at the market price of $44.80 per share, realizing a $0.20 per share loss.  
• Your profit on the transaction is $0.80 because you pocketed $1 from the initial sale of the option but lost $0.20 from selling the 100 shares from assignment at a loss.

Why Early Assignment is Nothing to Fear

Many beginning traders count early assignments as one of their biggest trading fears; on some level, it makes sense. As the seller of an option, you're accepting the burden of a legitimate obligation to your counterparty in exchange for a premium. You're giving up control, and the early assignment shoe can, on paper, drop at any time.

Exercising Options Early Burns Money

People rarely exercise options early because it simply doesn't make financial sense. By exercising an option, you're only capturing the option's intrinsic value and entirely forfeiting the extrinsic value to the option seller. There's seldom a reason to do this.

Let's put ourselves in the buyer's shoes. For instance, we pay $5 for a 30-day call with a strike price of $100 while the underlying is trading at $102. The call has $2 in intrinsic value, meaning our call is in-the-money by $2, which would be our profit if the option expired today.

The other $3 of the option price is extrinsic value. This is the value of time, volatility, and convexity. By exercising early, the buyer of an option is burning that $3 of extrinsic value just to lock in the $2 profit.

A much better alternative would be to sell the option and go and buy 100 shares of the stock in the open market.

Viewed in this light, an option seller can’t be blamed for looking at early assignment as a good thing, as they get to lock in their premium as profit.

Your Risk Doesn’t Change

One of the biggest worries about early assignment is that being assigned will somehow open the trader up to additional risk. For instance, if you’re assigned on a short call position, you’ll end up holding a short position in the underlying stock.

However, let me prove that the maximum risk in your positions stays the same due to early assignment.

How Early Assignment Doesn’t Change Your Position’s Maximum Risk

Perhaps you collect $2.00 in premium for shorting an ABC $50/$55 bear call spread. In other words, we're short the $50 call for a credit of $2.50 and long the $55 call, paying a debit of $0.50.

Before considering early assignment, let's determine our maximum risk on this call spread. The maximum risk for a bear call spread is the difference between the strike minus the net credit you receive. In this case, the difference between the strikes is $5, and we collect a net credit of $2, making our maximum risk on the position $3 or $300.

You wake up one morning with the underlying trading at $58 to find that the counterparty of your short $50 call has exercised its option, giving them the right to buy the underlying stock at $50 per share.

You'd end up short due to being forced to sell the buyer shares at $50. So you're short 100 shares of ABC with a cost basis of $50 per share. On that position, your P&L is -$800, the P&L on a $55 long call is +$250, on account of you paying $0.50, and the call being $3.00 in-the-money. And finally, because the option holder exercised early, you get to keep the entire credit you collected to sell the $50 call, so you've collected +$250.

So your P&L is $300. You've reached your max loss. Let's get extreme here. Suppose the price of the underlying runs to $100. Here are the P&Ls for each leg of the trade:

• Short stock: -$5,000  
• Long call: +$4,450  
• Net credit received from exercised short option: +$250  
• 5,000 - (4,450 + 250) = $300

While dealing with early assignments might be a hassle, it doesn’t open a trader up to additional risk they didn’t sign up for.

Margin Calls Usually Aren’t The End of the World

Getting a margin call due to early assignment isn't the end of the world. Believe it or not, stock brokerages have been around for a long time. They have seen early assignments many times before, and they have protocols for it.

Think about it intuitively, your broker allowed you to open the short option position knowing that the capital in your account could not cover an early assignment. Still, they let you make the trade anyways.

So what happens when you get an early assignment that you can’t cover? Your broker issues you a margin call. Once you’re in violation of their margin rules, they pretty much have carte blanche to handle the situation as they wish, including liquidating the assigned stock position at their will.

However, most brokers will give you some time to react to the situation and either decide to deposit more capital, liquidate the position on your own, or exercise offsetting options to fulfill the margin call in the case of an option spread.

Even though a margin call isn't fun, remember that the overall risk of your position doesn't change due to an early assignment, and it's typically not a momentous event to deal with. You probably just have to liquidate the trade.

When Early Assignment Might Occur?

Dividend Capture

One of the few times it might make sense for a trader to exercise an option early is when he's holding a call that is deep in-the-money, and there's an upcoming ex-dividend date.

Because deep ITM calls have very little extrinsic value (because their deltas are so high), any negligible extrinsic value is often outweighed by the value of an upcoming dividend payment , so it makes sense to exercise and collect the dividend.

Deep In-The-Money Options Near Expiration

While it's important to emphasize that the risk of early assignment is very low in most cases, the likelihood does rise when you're dealing with options with very little extrinsic value, like deep-in-the-money options. Although, even in those cases, the probabilities are pretty low.

However, an options trader that is trading to exploit market anomalies like the volatility risk premium, in which implied volatility tends to be overpriced, shouldn't even be trading deep-in-the-money options anyhow. Profitable option sellers tend to sell options with very little intrinsic value and tons of extrinsic value.

Bottom Line

Don't let the  fear of early assignment discourage you from selling options. Far worse things when shorting options! While it's true that early assignment can occur, it's typically not a big deal. Related articles

• Can Options Assignment Cause Margin Call?
• Assignment Risks To Avoid
• The Right To Exercise An Option?
• Options Expiration: 6 Things To Know
• Early Exercise: Call Options
• Expiration Surprises To Avoid
• Assignment And Exercise: The Mental Block
• Should You Close Short Options On Expiration Friday?
• Fear Of Options Assignment
• Day Before Expiration Trading
• Accurate Expiration Counting

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What Is Option Assignment?

Experienced traders know it is possible to turn a profit, even when the selected company’s shares lose value. Purchasing options to buy (call) or sell (put) shares in the future at a pre-determined price comes with risk – but when the bet pays off, there may be substantial rewards.

Option Assignment: The Basics

An options transaction begins with a contract. The writer of the contract agrees to buy or sell shares at an agreed-upon price , known as the strike price, within a specified timeframe.

In the US, the holder of the contract can exercise the option to buy or sell stock at the strike price any time, up to and including the contract’s expiration date. European options can only be exercised on the on the contract’s expiration date.

Options contracts are typically written in 100 share increments , so if the premium fee is $0.30 per share, one option (100 shares) would cost the contract holder $30.

Investors who hold options contracts are not required to exercise them. If they choose not to, they lose the per-share premium fee paid for the contract.

Risks & Benefits Of Options

Investors who believe that stock prices will increase can purchase options to buy shares at a specific price .

If share prices go up as expected, the contract holder has an opportunity to purchase them at the agreed upon rate, which is lower than market value. The contract itself can also be sold to other investors who want the option to buy at the option price.

Investors who believe share prices will decrease can purchase options to sell (or put) the shares to the contract writer .

Assuming the stock price does, in fact, go down, the contract holder profits by selling shares for more than market value.

Alternatively, if the contract holder does not already own the shares, it is possible to sell the contract itself. It has value to other investors who own the shares and want to reduce their losses when the value drops.

Assigning options is the process through which options buyers exercise their rights to buy or sell stock at the price agreed upon in the option contract. The transaction is “assigned” or matched to a contract writer, and the contract writer must meet the terms of the option agreement.

While the option contract buyer is not required to exercise options, the option contract writer is obligated to meet the conditions outlined in the agreement .

Short Call Option Assignment

Investors with options to buy shares at a pre-determined strike price own call options . They can buy or “call” shares away from the contract writer if they choose to exercise their options.

Call Option Assignment Example

Shares of XYZ Co. are currently selling at $50 per share. You believe the price will increase to $60 per share within a month. You purchase an option that allows you to buy 100 shares at $55 within the next month. This costs you $0.25 per share, for a total of $25.

If the share price doesn’t go above the strike price before your option expires, your loss is $25. However, if it does rise beyond $55, your option is “in the money”.

Say share prices increase to $58, and you choose to exercise your options. The transaction is automatically assigned to an option contract writer, and you have an opportunity to call or buy 100 shares of XYZ Co. from that writer at $55 per share.

Your profit is $3 per share or $300 (for every 1 call contract purchased), less the $25 premium and any transaction fees. To lower your transaction costs, consider tastyworks which charges $0 commissions on closing stock and options trades (*clearing fees still apply).

Option holders sometimes choose to exercise their buying rights even if share prices don’t increase as expected when there is a dividend coming up. Of course, this only makes sense when the amount of the dividend is enough to offset fees and still turn a profit for the option contract holder.

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Short Put Option Assignment

A contract to sell shares at a specific strike price is referred to as a put option. These are typically used when investors believe shares of a specific company will go down, and they want to protect existing assets or profit from this downturn in the stock’s price.

Put Option Assignment Example

It works like this: Shares of XYZ Co. are currently selling at $50 per share, but you believe the price is going to drop by 20 percent. You purchase an option to sell 100 shares at $45 within the next month, which is the price you originally paid when you bought the shares. You pay a premium of $0.25 per share, or $25 (for each option contract).

As expected, XYZ Co. experiences a dramatic loss, and shares drop to $38 each. Since you already own these shares, along with a put option, you can “put” them to an options contract holder.

Your transaction is assigned to a contract holder automatically, and the holder must purchase your shares at $45 each. This mitigates the loss you might have otherwise experienced when your stock lost value.

Even if you don’t already own the shares, you can still profit from a put option. You can buy the shares at their current price of $38, then sell them by exercising your option to sell at $45, or you can sell the contract itself. Others who own XYZ Co. shares are also looking for ways to offset some of their losses.

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Option Assignment Can Be Good!

Selling call and put option contracts comes with significant risk, even for the most seasoned investors.

The upside is that when options expire without being exercised, contract writers profit from the premium fees collected. The downside for call contract writers is the potential loss of profit if share prices increase substantially and your options are assigned.

Writing put contracts is slightly less risky, in that contract writers can hold the purchased shares in hopes that prices eventually recover.

Those who hold options contracts risk the loss of their premium fees, but this can be a worthwhile gamble for a number of reasons.

Options can be used to protect a portfolio from the standard ups and downs of the market – a useful feature for investors who have short-term financial goals.

They can also offer an opportunity to speculate on future market changes with limited risk, as the only loss is the loss of premium fees.

To get started trading options, view risk graphs, and access free options trading tutorials, check out thinkorswim .

>> Options Vs Stocks

>> Buying Puts: How To Bet Against The Market

>> How To Trade A Bull Put Spread

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