option assignment and exercise

projectfinance

Step up your finance game.

Option Exercise and Assignment Explained w/ Visuals

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.

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

Additional resources.

Exercise and Assignment – CME Group

Learn About Exercise and Assignment – CME Group

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

For the Public

FINRA Data provides non-commercial use of data, specifically the ability to save data views and create and manage a Bond Watchlist.

For Industry Professionals

Registered representatives can fulfill Continuing Education requirements, view their industry CRD record and perform other compliance tasks.

For Member Firms

FINRA GATEWAY

Firm compliance professionals can access filings and requests, run reports and submit support tickets.

For Case Participants

Arbitration and mediation case participants and FINRA neutrals can view case information and submit documents through this Dispute Resolution Portal.

Need Help? | Check System Status

Log In to other FINRA systems

Trading Options: Understanding Assignment

The options market can seem to have a language of its own. To the average investor, there are likely a number of unfamiliar terms, but for an individual with a short options position—someone who has sold call or put options—there is perhaps no term more important than " assignment "—the fulfilling of the requirements of an options contract.

Options trading carries risk and requires specific approval from an investor's brokerage firm. For information about the inherent risks and characteristics of the options market, refer to the Characteristics and Risks of Standardized Options also known as the Options Disclosure Document (ODD).

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.

Learn more about  options from FINRA or access free courses like Options 101 at OCC Learning .

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 .

Investor Alert: Relationship Investment Scams

Compare Funds With FINRA’s Fund Analyzer

Investing with Charitable Giving in Mind

The Importance of Scheduling an Annual 401(k) Checkup

The Importance of Investment Recordkeeping

• Why Merrill
• Open An Account
• Why Choose Merrill
• Pricing & Fees
• BofA Preferred Rewards
• Investing & Banking Connected
• Mobile Investing
• Sustainable Investing
• Awards & Accolades

888.637.3343

To find the small business retirement plan that works for you, contact:

Learn more about an advisor's background on FINRA's BrokerCheck

• Personalized Investment Options
• Merrill Edge ® Self-Directed
• Merrill Guided Investing
• Invest with an Advisor
• Compare All
• General Investing
• Education Accounts
• Mutual Funds
• Fixed Income & Bonds
• Margin Trading
• Order Execution Quality
• Idea Builder
• Merrill Edge MarketPro ®
• Early in Your Career
• Peak Earning Years
• Nearing Retirement
• In Retirement
• View all Tools
• Tax Resources
• Plan for College
• College Cost Calculator
• 529 Plan State Tax Calculator
• Plan for Retirement
• Personal Retirement Calculator
• Retirement Account Selector Tool
• 401(k) Rollover Calculator
• Traditional IRA
• Income in Retirement
• Retirement Account Types
• Retirement Tools
• Small Business 401(k)
• Individual 401(k)
• View All Plans

• Get Started Investing
• Investing Basics
• Advanced Investing
• Market & Investing Insights
• Account Options
• Individual Investing Account
• Joint Investing Account
• Custodial Investing Account
• Traditional Inherited IRA
• Roth Inherited IRA
• 529 College Savings Plans
• Custodial UGMA/UTMA Accounts
• Business Investor Account
• lnvesting Costs & Fees
• Pricing & Fees
• Investing & Banking Connected
• Awards & Accolades
• Merrill Edge ® Self-Directed
• Investing with an Advisor
• Compare all
• Fixed Income & Bonds
• Merrill Edge MarketPro ®
• Retirement Account Selector
• 401(k) Rollover Tool
• View all tools
• New to Investing
• Tax Plannning
• Investing by Life Stages
• View all plans
• Market & Investing Insights
• Help When You Want It Find answers to common questions  at Merrill Schedule an appointment  with Merrill To find the small business retirement plan that works for you, contact: [email protected]

Exercising Options

Submitting exercise or do-not-exercise instructions:.

• All Instructions must be called in and are only applicable to long positions
• Do-Not-Exercise instructions can only be submitted the day of expiration up through market close
• Exercise instructions can be submitted at any time until expiration
• Merrill may take action at any time to close out positions that may not be able to be supported if exercised/assigned. It is extremely important to monitor your open options positions and be aware of your risk exposure.

What's the Net?

Automatic exercise/ assignment, early exercise/assignment, without the jargon, what are options, what are the types of options, what are the greeks, similar articles, options pricing, equity option basics, equity index options.

This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF) .

I'd Like to

• Create an Emergency Fund
• Create an Investment Strategy
• Open an Account  with Merrill

Discover Merrill

• Bank of America Preferred Rewards
• Online Trading
• Awards & Recognition

Representatives are available 24/7

[email protected]

Unlimited $0 Trades

Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

The performance data contained herein represents past performance which does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For performance information current to the most recent month end, please contact us.

Net Asset Value (NAV) returns are based on the prior-day closing NAV value at 4 p.m. ET. NAV returns assume the reinvestment of all dividend and capital gain distributions at NAV when paid.

Market price returns are based on the prior-day closing market price, which is the average of the midpoint bid-ask prices at 4 p.m. ET. Market price returns do not represent the returns an investor would receive if shares were traded at other times.

Returns include fees and applicable loads. Since Inception returns are provided for funds with less than 10 years of history and are as of the fund's inception date. 10 year returns are provided for funds with greater than 10 years of history.

Before investing consider carefully the investment objectives, risks, and charges and expenses of the fund, including management fees, other expenses and special risks. This and other information may be found in each fund's prospectus or summary prospectus, if available. Always read the prospectus or summary prospectus carefully before you invest or send money. Prospectuses can be obtained by contacting us.

Expense Ratio – Gross Expense Ratio is the total annual operating expense (before waivers or reimbursements) from the fund's most recent prospectus. You should also review the fund's detailed annual fund operating expenses which are provided in the fund's prospectus.

This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (Form CRS) (PDF) .

Banking products are provided by Bank of America, N.A. and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation ("BofA Corp.").

Merrill Lynch Life Agency Inc. (MLLA) is a licensed insurance agency and wholly owned subsidiary of BofA Corp.

© 2024 Bank of America Corporation. All rights reserved.

• Find a Branch
• Schwab Brokerage 800-435-4000
• Schwab Password Reset 800-780-2755
• Schwab Bank 888-403-9000
• Schwab Intelligent Portfolios® 855-694-5208
• Schwab Trading Services 888-245-6864
• Workplace Retirement Plans 800-724-7526

... More ways to contact Schwab

  Chat

• Schwab International
• Schwab Advisor Services™
• Schwab Intelligent Portfolios®
• Schwab Alliance
• Schwab Charitable™
• Retirement Plan Center
• Equity Awards Center®
• Learning Quest® 529
• Charles Schwab Investment Management (CSIM)
• Portfolio Management Services
• Open an Account

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

Long Options | 8-22-24

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.

Investing in financial products involves risk to your capital.

Financial Education

Asset Classes

• More Campus

Finance Courses and Lessons

Featured Lessons

Economic Forecast Contracts from ForecastEx

Financial News and Market Commentary

Featured Articles

• Personal Finance

Deciphering the Market: Choosing Your Investment

50 Doesn’t Seem So Nifty Today

Quantitative Code and News

Quant Articles

Data Science - R Development

R Code: Setting X-Axis As The Selected Dates

• Data Science

Candlestick Patterns: How To Read Charts, Trading, and More – Part I

Webinars from Financial Professionals

Webinar Topics

Latest Webinars

Sep / 16 / 2024 - 12:00 pm - EDT

Trading Vertical Credit Spreads In A Volatile Market

Sep / 16 / 2024 - 10:00 am - EDT

Beyond Oil – Exploring Saudi Market Gems

SNB Capital

Financial Market Commentary Podcasts

Listen to IBKR Podcasts on

Featured Podcasts

• IBKR Podcasts

Jensen Huang > Jerome Powell

What’s on Your Calendar [Spread]

API Tools from Interactive Brokers

FIX Protocol

Third-Party Integrations

Featured API Articles

• Python Development

Using Pandas for Market Data Management

Python Development - REST Development

Handling Options Chains

Intro to the TWS API

Free investment financial education

Learn more about IBKR accounts

Low Commissions 1 , Global Access, Premiere Technology

Finance Training in the Classroom

Sample Curricula

The IBKR Advantage

Real-world experience for your classroom

IBKR Glossary of Financial Terms

Find by letter or search

Useful Tools and Information

Newsletter Signup

Multilingual content from IBKR

Getting Started at IBKR

• All Finance Courses
• Beginner Courses
• Intermediate Courses
• Advanced Courses
• Other Trading Products
• IBKR Student Trading Lab
• Fundamentals
• Intro to IBKR Tools
• Advanced IBKR Tools
• Institutions
• Chinese (Simplified)
• French (Canadian)
• Spanish – Español
• Traders’ Insight Home
• IBKR Economic Landscape
• IBKR Commentary
• Fixed Income
• Commodities
• Securities Lending
• Technical Analysis
• IBKR Quant Home
• Quant Development
• Conferences
• C# Development
• C++ Development
• Java Development
• Julia Development
• R Development
• REST Development
• TWS Excel API
• Upcoming Webinars
• Webinars Aired
• Webinar Contributors
• AI & Machine Learning
• Alternative Investments
• Cryptocurrency
• Energy Sector
• Financial Spotlight
• International
• Women in Finance
• Podcasts Home
• Cents of Security
• Podcasts En Español
• Contributor Podcasts
• Leave a Review
• IBKR-API Home
• Documentation Changelog
• Getting Started
• Market Data Subscriptions
• Order Types
• Web API Documentation
• Web API Reference
• Web API v1.0 Documentation
• TWS API Documentation
• TWS API Reference
• Excel ActiveX
• Available/Existing Integrations
• Prospective Integrations
• Stocks Education
• Options Education
• Futures Education
• Bonds Education
• Forex Education
• For Teachers
• For Students
• Educator Trading Lab
• Simulated Competition
• Stock Trading Sample Assignments
• Option Trading Sample Assignments
• Futures Trading Sample Assignments
• Forex Trading Sample Assignments
• Computer Science Sample Assignments
• Economics Sample Assignments
• ESG Sample Assignment
• All Glossary Terms
• IBKR Quant Terms

More Campus Resources

• About The IBKR Campus
• IBKR Campus Contributors
• IBKR Campus Authors
• IBKR Guides
• Live Charting
• IBKR Campus Newsletter
• Traders’ Insight Newsletter
• IBKR Webinars Newsletter
• IBKR Quant Newsletter
• IBKR API Newsletter
• Commencer chez IBKR
• Introdução à IBKR
• Introducción a IBKR
• IBKR Podcasts Español

Exercise and Assignment

Lesson 5 of 7, duration 5:49.

There are two styles of options, European and American. The difference between the two is that European style options cannot be exercised early while American style options can. In this lesson, we will go over the exercise and assignment process and possible reasons why an investor may exercise an option early and the risks associated with getting assigned early.

What is option exercise and assignment?

The holder of the option has the right to exercise or convert the option into the underlying. For an equity call option, the holder will receive 100 shares of the stock at the strike price if they exercise and the holder of a put option will sell 100 shares of stock at the strike price if they exercise. Conversely the seller of the call option will have to sell 100 shares of stock at the strike price if they are assigned and the seller of the put option must buy the stock at the strike price if they are assigned.

For example, ABC stock is trading at $100 at expiration. An investor who bought an ABC 90 call can exercise the call and pay $90 for ABC stock even though it is trading at $100. An investor who sold an ABC 90 call will be assigned and must sell 100 shares at $90.

Remember, the holder or buyer of the option has all the rights, and the seller or writer has all the obligations. If ABC stock is trading at $100 at expiration an investor who bought an ABC 90 put would let it lapse or not exercise since they would end up selling 100 shares of ABC at $90 when they could sell the 100 shares at $100 in the market.

What is automatic exercise?

Options that are in-the-money at expiration will be automatically exercised, this is also known as exercise by exception, unless specifically instructed by the holder not to do so. This procedure will automatically exercise in-the-money options to protect the holder from losing the intrinsic value of the option. The Option Clearing Corporation, OCC, uses a $0.01 threshold but it is possible that the investor’s clearing and/or brokerage firm may use a different value, so it is important that the investor checks with them.

How does the exercise & assignment process work?

For exchange traded options in the U.S. the OCC plays an important role in the exercise and assignment process. They are the intermediary between buyers and sellers, and they issue and guarantee all option contracts. When an option is exercised, the option holders trading or brokerage firm notifies their clearing firm, and the clearing firm notifies the OCC. The OCC then notifies the writer’s clearing firm, which notifies the seller’s trading or brokerage firm and then the seller is assigned the appropriate contra underlying position to the holder.

The assignment process is random, so the buyer and seller involved with the original option transaction usually don’t exchange the underlying if the option is exercised but will transact with another investor instead via the OCC.

What is pin risk?

Pin risk applies to sellers of options when the underlying closes at its strike price on expiration. Going back to our ABC stock example, in this scenario the investor sold 10 ABC 90 calls and ABC stock closed at $90 on expiration. The investor does not know whether they will be assigned all 10 calls, zero calls, or some number in between and must guess on the number of shares that they may be short after expiration. Pin risk makes it extremely hard for the investor to hedge their option position and they will know how many shares of the underlying they are long or short until they are notified of the amount of shares they are assigned.

What is an early option exercise and why would an investor exercise an option early?

As discussed earlier in this lesson there are two types of options: American style and European style, the ability to exercise early only applies to American style options. An investor may want to exercise an option early for a few reasons. For calls, the underlying may be going ex-dividend, and the investor wants to convert the option to the underlying to receive payment or the stock may become hard to borrow and the investor may want to cover a short position to avoid paying high borrow fees. An investor may exercise puts to take advantage of interest rates.

How does an investor exercise an option early?

Brokers will have daily cut-off times to submit early exercises so an investor should contact their broker for the proper procedure.

Early assignment risk

An investor who has short options may find themselves unexpectedly assigned prior to expiration. This is one of the risks that investors who sell options face. The investor should pay attention to upcoming corporate actions, borrowing fees, and interest rates as part of their risk management strategy and be aware of the potential to be assigned early on their short-option positions.

Join The Conversation

If you have a general question, it may already be covered in our FAQs . If you have an account-specific question or concern, please reach out to Client Services .

Facebook .cls-1{fill:none;} .cls-1,.icon-social{stroke-width:0px;} .icon-social{fill:#000;} LinkedIn .cls-1{fill:none;} .cls-1,.icon-social{stroke-width:0px;} .icon-social{fill:#000;} X .cls-1{fill:none;} .cls-1,.icon-social{stroke-width:0px;} .icon-social{fill:#000;} YouTube .cls-1{fill:none;} .cls-1,.icon-social{stroke-width:0px;} .icon-social{fill:#000;} RSS .cls-1{fill:none;} .cls-1,.icon-social{stroke-width:0px;} .icon-social{fill:#000;}

Leave a reply cancel reply, disclosure: interactive brokers.

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the "Characteristics and Risks of Standardized Options" also known as the options disclosure document (ODD) or visit ibkr.com/occ

Disclosure: Options (with multiple legs)

Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options by clicking the link below. Multiple leg strategies, including spreads, will incur multiple transaction costs. "Characteristics and Risks of Standardized Options"

Disclosure: Multiple Leg Strategies

Multiple leg strategies, including spreads and straddles, will incur multiple commission charges.

Ask a Curriculum Question

This form is aimed at answering questions about this lesson only. If you have questions about your Interactive Brokers account please contact Customer Service .

IBKR Campus Newsletters

Bi-weekly newsletter.

Get updates on podcasts, webinars, courses, and more from our IBKR pillars.

Daily Newsletter

View the latest financial news articles from the top voices in the industry.

Weekly Newsletter

For those wanting to trade markets using computer-power by coders and developers.

Monthly Newsletter

Hear about the latest tools and techniques from our own IBKR API staff.

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Traders' Insight RSS

To add ibkr traders’ insight to your rss feed, please paste the following link into your reader:, ibkr quant rss, to add ibkr quant to your rss feed, please paste the following link into your reader:, this page contains information regarding options trading.

To view this page, you must acknowledge that you have received the Characteristics & Risks of Standardized Options, also known as the options disclosure document (ODD). Options involve risk and are not suitable for all investors. For more information, click here to read the " Characteristics and Risks of Standardized Options " or visit: ibkr.com/occ

By acknowledging this disclosure you are also allowing this website to use "functional" cookies on your browser. To find out more about cookies, see our privacy settings.

Privacy Preference Center

Your privacy.

When you visit any website it may use cookies and web beacons to store or retrieve information on your browser. This information might be about you, your preferences or your device and is typically used to make the website work as expected. The information does not usually directly identify you, but can provide a personalized browsing experience. Because we respect your right to privacy, you can choose not to allow some types of cookies and web beacons. Please click on the different category headings to find out more and change our default settings. However, blocking some types of cookies may impact your experience on our website and limit the services we can offer.

Strictly Necessary Cookies

Strictly necessary cookies are necessary for the website to function and cannot be switched off in our systems. They are typically set in response to actions made by you which amount to a request for services, such as setting your privacy preferences, logging in or filling in forms. While you can set your browser to block or alert you about these cookies, some parts of the website will not work. These cookies do not store any personally identifiable information.

ALWAYS ACTIVE

Performance Cookies

Performance cookies and web beacons allow us to count visits and traffic sources so we can measure and improve website performance. They help us to know which pages are the most and least popular and see how visitors navigate around our website. All information these cookies and web beacons collect is aggregated and anonymous. If you do not allow these cookies and web beacons we will not know when you have visited our website and will not be able to monitor its performance.

Allow Performance Cookies:

Functional Cookies

Functional cookies enable our website to provide enhanced functionality and personalization. They may be set by us or by third party providers whose services we have added to our pages. If you do not allow these cookies then some or all of these services may not function properly.

Allow Functional Cookies:

Marketing Cookies and Web Beacons

Marketing Cookies and web beacons may be set through our website by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other websites. They do not directly store personal information, but uniquely identify your browser and internet device. If you do not allow these cookies and web beacons, you will experience less targeted advertising. Our website does not track users when they cross to third party websites, does not provide targeted advertising to them and therefore does not respond to "Do Not Track" signals.

Allow Marketing Cookies:

Interactive Brokers Group Cookie Policy

What are Cookies and Web Beacons?

Cookies are pieces of data that a website transfers to a user's hard drive for record-keeping purposes. Web beacons are transparent pixel images that are used in collecting information about website usage, e-mail response and tracking. Generally, cookies may contain information about your Internet Protocol ("IP") addresses, the region or general location where your computer or device is accessing the internet, browser type, operating system and other usage information about the website or your usage of our services, including a history of the pages you view.

How We Use Cookies and Web Beacons

Interactive Brokers Group collects information from cookies and web beacons and stores it in an internal database. This information is retained in accordance with our Privacy Policy. This website uses the following cookies and web beacons:

These cookies are necessary for the website to function and cannot be switched off in our systems. They are usually only set in response to actions made by you which amount to a request for services, such as setting your privacy preferences, logging in or filling in forms. You can configure your browser to block or alert you about these cookies, but certain areas of the site will not function properly. These cookies do not store any personal data.

Performance Cookies and Web Beacons

These cookies and web beacons allow us to count visits and traffic sources so we can measure and improve the performance of our site. They help us to know which pages are the most and least popular and see how visitors move around the site. All information that these cookies and web beacons collect is aggregated and, therefore, anonymous. If you do not allow these cookies and web beacons our aggregated statistics will not have a record of your visit. The website uses Google Analytics, a web analytics service provided by Google, Inc. ("Google"). Google Analytics uses cookies to help analyse how you use this website. The information generated by the cookie about your use of this website (including your IP address) will be transmitted to and stored by Google on servers in the United States. Google will use this information for the purposes of evaluating your use of the website, compiling reports on website activity for website operators and providing other services relating to website activity and internet usage. Google may also transfer this information to third parties where required to do so by law, or where such third parties process the information on Google's behalf. Google will not associate your IP address with any other data held by Google.

These cookies enable the website to provide enhanced functionality and personalization. They may be set by us or by third party providers whose services we have added to our pages. If you do not allow these cookies, some or all of these services may not function properly.

These cookies and web beacons may be set throughout our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant advertisements on other sites. They do not store personal information that could identify you directly, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies and web beacons, you will experience less targeted advertising. The website does not track users when they cross to third party websites, does not provide targeted advertising to them and therefore does not respond to Do Not Track ("DNT") signals.

Managing Your Cookie Preferences

You have many choices with regards to the management of cookies on your computer. All major browsers allow you to block or delete cookies from your system. However, if you do decide to disable cookies you may not be able to access some areas of our website or the website may function incorrectly. To learn more about your ability to manage cookies and web beacons and how to disable them, please consult the privacy features in your browser or visit www.allaboutcookies.org. This website may link through to third party websites which may also use cookies and web beacons over which we have no control. We recommend that you check the relevant third parties privacy policy for information about any cookies and web beacons that may be used.

IBKR LLC (U.S.)

We are redirecting you to the Interactive Brokers LLC (U.S.) Website. Should you decide to open an account, you will be redirected to the account application for your region. You can also find the website of the IBKR entity for your region at the bottom of this page.

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.

An Overview on Esoteric Debt

What is an Effective Annual Interest Rate?

How to Calculate Depreciation Recapture

What is Direct Investment?

Unlocking the Degree of Financial Leverage

Disfold Blog

Data, Tools, and Resources for Business and Finance

Mastering Exercising and Assignment in Options Trading

Understanding the intricacies of exercising and assignment in options trading is essential for success in the financial markets. This guide delves into these concepts, providing clarity and practical insights to enhance your trading strategies.

What is Exercising an Option ?

Exercising an option means utilizing the right to buy (in the case of a call option ) or sell (for a put option ) the underlying asset at the strike price . This process is central to options trading, and understanding when and how to exercise can significantly affect your trading outcomes.

Types of Options

Before diving deeper, it’s crucial to understand the two main types of options:

• Call Options: These provide the holder the right to buy the underlying asset at a predetermined price, potentially profiting if the asset’s market price rises above this strike price.
• Put Options: These grant the holder the right to sell the underlying asset at a set price, beneficial if the asset’s price falls below the strike price.

When to Exercise?

Deciding when to exercise an option is a critical factor that can impact profitability. Consider these key factors:

• In-the-Money Options: Exercise options with intrinsic value ; for call options, this means the underlying asset’s price exceeds the strike price, while for put options, it implies the asset’s price is below the strike price.
• Time Remaining: If your option is approaching expiration and you do not anticipate further favorable price movements, exercising could be more beneficial than holding.
• Dividends: If holding the underlying asset entitles you to dividends, consider exercising your call option before the ex- dividend date to capture those payments.
• Capital Gains Tax: Evaluate potential tax implications, as exercising an option can have different tax consequences than simply selling it.
• Market Conditions: Analyze current market trends and underlying asset performance to decide the best timing for exercising.

Benefits of Exercising Options

Exercising options can offer significant advantages:

• Access to Underlying Assets: Secure the asset at the agreed price, providing leverage in a rising market.
• Profit Realization: Capture profits by exercising options when they align favorably with market conditions, rather than simply trading the options.
• Leverage: Increase exposure to the underlying asset with a smaller upfront investment.
• Long-Term Strategy: Gain ownership of the asset, allowing for appreciation over time and strategic asset management.
• Hedging Opportunities: Exercising options may serve as a hedge against other investments, contributing to a well-rounded investment strategy.

What is Assignment in Options Trading?

Assignment occurs when the writer (or seller) of the option receives a notice that the option holder has exercised their right. Understanding assignment is crucial, as it can result in unexpected obligations for the option writer, impacting both trading strategy and finances.

Assignment Process

Here’s a basic rundown of how the assignment works:

• The exercise of an option triggers assignment for the seller of the corresponding option.
• Assignment can happen at any time for American-style options (which can be exercised anytime before expiration) or only at expiration for European-style options.
• The seller must fulfill their obligation by either selling or buying the underlying asset at the agreed-upon strike price, which can lead to significant financial implications depending on market conditions.
• Options exchanges typically assign contracts randomly, meaning sellers must be prepared for unexpected notifications.

Managing Assignment Risk

To mitigate risks associated with assignment, consider these strategies:

• Monitor Positions: Regularly review your options positions, especially as expiration approaches, particularly for those near the money.
• Understand the Market: Stay updated on stock price movements and overall market conditions that could trigger unexpected assignments.
• Preemptive Action: Close positions proactively if an option is likely to be exercised before expiration, thus avoiding assignment.
• Diversification : Implement a diverse strategy to mitigate the financial impact of potential assignments.
• Know Your Obligations: Clearly understand the obligations tied to your options and prepare for possible assignment outcomes.

Strategies and Best Practices

Mastering the concepts of exercising and assignment necessitates implementing effective strategies and best practices. Here are actionable steps you can take:

• Educate Yourself: Continuously enhance your knowledge of options strategies, market analysis techniques, and risk management principles.
• Create a Trading Plan: Develop a comprehensive trading plan that outlines your entry and exit strategies, as well as specific criteria for exercising options or managing assignments.
• Consult with Professionals: Seek mentorship or advice from experienced traders or financial advisors whenever you’re uncertain about executing your options strategy.
• Stay Updated: Regularly follow news and trends relevant to your underlying assets to make informed decisions regarding your options positions.
• Keep Emotions in Check: Maintain discipline in your trading approach to make rational decisions rather than emotional ones that could cloud your judgment.
• Utilize Options Analytics Tools: Implement technology and analytic tools that provide insights into option pricing , volatility , and trends to enhance decision-making.

Mastering the nuances of exercising and assignment in options trading goes beyond understanding the mechanics—it’s about strategically applying that knowledge to optimize your trading results. Remain informed, proactive, and engaged with other traders to share insights and experiences, fostering an environment of continuous learning and improvement. This approach can help you turn potential risks into lucrative opportunities, leading to a more resilient trading strategy.

What strategies have you found most effective in navigating exercising and assignment in your options trading? Feel free to share your thoughts in the comments!

Related Posts

Top Downloads

Save tens of hours in 2 minutes!

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Join 3,000 data-loving subscribers who enjoy special offers and our Weekly Market Overview: Top Moving Indices & Stocks | Indices’ Breakouts & Breakdowns | Golden & Death Crosses… and Upcoming Ones! Subscribe Now!

Email address:

Please upgrade your browser

E*TRADE uses features that may not be supported by your current browser and might not work as intended. For the best user experience,  please use an updated browser .

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.

• Search Search Please fill out this field.
• Assets & Markets

What Is an Option Assignment?

Definition and Examples of Assignment

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

Morsa Images / Getty Images

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 Income Mastery
• Accelerator Program

Option Assignment and Exercise

Options trading 101 - the ultimate beginners guide to options.

Download The 12,000 Word Guide

It’s not sexy, but option assignment and exercise is something you need to know before trading options.

One of the first things to keep in mind about call and put transactions is that two parties are involved in both of them.

They are the party that is writing the contract, or selling the option.

The other party is the one that is buying it.

Introduction

Role of the occ, american and european options, why would you choose european options, exercising calls early, exercising puts early, getting assigned on a multi-leg strategy.

• Who’s Keeping Track of All This?

The term exercise is used when the owner of a call or put “exercises” his or her right to buy or sell the stock.

They buy shares if the option is a call and they sell shares if they held a put.

The term assignment is used when someone has a short position in a call or put and is called upon to fulfill their obligation by someone who is exercising their rights .

Unlike exercising the option, assignment means they must sell if it is a call and they must buy it if it is a put.

In the case of assignments, you would receive an assignment notice when your short options are assigned.

The Options Clearing Corporation (OCC) acts as the middle man between buyers and sellers of options and is responsible for  the assignment process.

It sends assignment notices to brokers, which allocates those notices to accounts which are short the options, usually on a first-in, first-out basis.

An interesting tidbit about the OCC relates to its provisions for the automatic exercise of certain in-the-money options at expiration.

According to the Chicago Board Options Exchange (CBOE), a procedure referred to as “exercise by exception” allows the OCC to automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money.

It can do the same for an index option that is $.01 or more in-the-money.

However, a specific brokerage firm’s threshold for such automatic exercise may or may not be the same as OCC’s, notes the CBOE.

Now that you’ve gotten the gist of what exercise and assignment mean, let’s look at the two different styles of options – European and American .

Contrary to their names, these styles do not refer to countries, continents or what exchanges they are traded on. These styles instead are used to determine how an option’s contract can be exercised or assigned.

With American-style options, the contract can be exercised at any time before the expiration date. However, with European-style options, the contract can only be exercised on the expiration date.

Another key difference between American-style options and European-style options deals with the last day they can be traded.

American-style index option contracts can be traded up until expiration on Friday. If that day is a holiday when the markets are closed, the last day would be the previous day.

European-style index option contracts can be traded up until the business day before the day the settlement value is calculated. The last trading day is generally a Thursday, and the day the settlement value is calculated is Friday unless that day is a holiday.

Keep this in mind, too. Equity calls and puts traded in the U.S. are typically American style.

However, index options traded in the U.S. tend to be European style. Keep in mind that “either style of option can still be bought or sold to close your position in the marketplace at any point during the contract’s lifetime.”

Given you are taking one heck of a risk in trading options in the first place, you may ask why in the world would you choose the European style since it means you won’t be able to exercise the contract before the expiration date.

For one thing, they tend to be cheaper than American-style options. That’s due to the chance that a stock’s price will go up before the expiration date.

If this happens, holders of American-style call options (remember you buy calls if you think the price will go up) can take advantage on the higher value that comes from the stock’s price moving up.

Many options market players will tell you to avoid exercising your option contracts early. The reason is due to the likelihood that any option premium you could gain as the expiration date nears could be lost.

Still, there are times when exercising the option early is worth it. Let’s take a scenario in which you have a call option that is deep in-the-money before the underlying stock goes ex-dividend. By exercising the option early, you could capture that dividend, which could considerably make up for the loss of option premium caused by the early exercise.

Also noteworthy is what usually happens to a stock’s price after it goes ex-dividend. It falls. What does this do? It causes the value of the call to fall. So, there would hardly ever be a reason to exercise a call early if the underlying stock doesn’t pay a dividend.

Exercising American style puts before expiration directly relates to being able to collect any interest your investment has gained from shorting the underlying stock.

According to CBOE, most professional traders will exercise deep in-the-money puts that have little or no time premium remaining.

If there is a large bid-ask spread on the options, it can be cheaper to exercise the put than close it out.

For more information on exercise and assignment, Thinkorswim has some good information as does the CBOE .

I have to be honest, this is a real pain in the ass when this happens. If you have a butterfly spread for example, and the short options get assigned it can be a tricky situation.

My advice in this situation is to close the remaining legs and get what you can out of the trade. The better advice is to try and avoid this situation in the first place.

If you have a trade with short options that are in-the-money or at-the-money you should check when the dividend is due and get out of the trade beforehand. Also, the closer you get to expiry, the more likely you are to be assigned due to the lack of time premium.

Who’s Keeping Track Of All This?

A body called the Options Clearing Corporation is charged with clearing put and call transactions. Due to its charge, it falls under the jurisdiction of the SEC. It touts providing central counterparty (CCP) clearing and settlement services to 17 exchanges and trading platforms, including for options.

Options trading can be challenging at the best of times without having to deal with your short options being assigned.

We hope you enjoyed this article on option assignment and exercise.

If you have any questions, leave a comment below or send an email.

Like it? Share it!

This is an email I received from a reader on this very topic. Thought it was worth sharing:

Thanks for the post, Gavin! This just happened to me last week with a 4-contract 196/198 SPY Call spread that was in the money. Last Thursday, the day before expiry, the 196 short leg got exercised, leaving -$80,000 in my account. I immediately exercised the 198 longs, but had to swallow an additional $375 dividend pay on top of the loss of the spread. Ouch!! (you might want to mention that in your blog…). I thought my risk was limited to $800 minus the $300 credit. This almost doubled my loss!!

Your post is helpful in explaining this. Wish I knew this before last week, but alas… it’s an expensive lesson that I will not forget!

Great sharing. Thanks for your insights.

Selling Put Options is new to me. As I was not 100% sure what would happen – I went short of the time to expiry (10 days) but still exercised early. Reason – FEAR!

I’ve since convinced myself that the likelihood of something going wrong is small – so while I keep the expiry date short which keeps me focused on early exercise and realize the purchaser is not likely to need a bailout as the stock continues to gain in price.

Appreciate your mention of RSI Indicator for when to exercise.

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

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 🙂

FEATURED ARTICLES

Small Account Option Strategies

The Ultimate Guide To Implied Volatility

What Is A Calendar Spread?

3,500 word guide.

Everything You Need To Know About Butterfly Spreads

Iron Condors: The Complete Guide With Examples and Strategies

• Search Search Please fill out this field.
• Options and Derivatives
• Strategy & Education

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.

• Terms of Service
• Editorial Policy
• Privacy Policy