Options Foundations

Assignment

Assignment refers to the obligation of an option seller to fulfill the contract's terms when the option holder, or buyer, chooses to exercise their right. Option sellers are often referred to as option writers, or being short the contract.

Steps in the assignment process for early exercise

Decision to exercise
Option holders may choose to exercise early when market conditions align, potentially fearing a reversal in stock prices that could erode profits, or wanting to capitalize on an upcoming dividend
Initial notification
The Options Clearing Corporation is informed upon early exercise, randomly assigning a brokerage client who is short a matching option.
Assignment notification
The short option holder is notified by their brokerage about being assigned and is now responsible for meeting the option contract's terms.
Fulfilling the obligation
Option writers must deliver the underlying asset for call options or pay for the underlying asset for put options. This is typically an automated process carried out by brokerages.

Assignment at expiration

As an option writer, there is risk of assignment up until expiration. This is because any option contract that is in-the-money at the time of expiration will be automatically exercised, even if it is only in the money by $0.01, unless the option owner specifically requests to have it not exercised.

Risk of assignment

Selling options carries the risk of assignment, especially if you lack the collateral. If your contract is assigned and you don’t have the necessary buying power or shares, this could result in a debit balance or being short shares. Preparedness is crucial to navigate potential challenges.

Avoiding assignment

Investors can mitigate assignment risks by closing out positions well before expiration, particularly if the option is approaching an in-the-money status, providing more control and potential savings.

Basic example

Let’s say you've sold a call option on FlyFit at $50, and sometime after the stock rises to $60. Seeing this favorable condition, a person who bought an option with the same conditions decides to exercise their right to buy FlyFit shares at $50.

This triggers a notification to the Options Clearing Corporation, which randomly selects a member brokerage, who then randomly nominates you as the option writer, as you’re short this specific type of contact.

From there, we’ll get in touch and notify you that you’ve been assigned and are now responsible for delivering FlyFit shares at the agreed $50 strike price to the options holder. In exchange for delivering the shares, you will be paid $50 per share from the options holder.

Brokerage services for US-listed securities and options offered through Public Investing, member FINRA & SIPC. Supporting documentation upon request.

The examples used above are fictional, and do not constitute a recommendation or endorsement of any investment.

Options are not suitable for all investors and carry significant risk. Certain complex options strategies carry additional risk. There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, among others, as compared with a single option trade.

Prior to buying or selling an option, investors must read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD).

Option strategies that call for multiple purchases and/or sales of options contracts, such as spreads, collars, and straddles, may incur significant transaction costs.