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What Is an Option Assignment?
Definition and Examples of Assignment
How does assignment work, what it means for individual investors.
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An option assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. Let’s explain what that means in more detail.
- 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.
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Assignment: Definition in Finance, How It Works, and Examples
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
What Is an Assignment?
Assignment most often refers to one of two definitions in the financial world:
- The transfer of an individual's rights or property to another person or business. This concept exists in a variety of business transactions and is often spelled out contractually.
- In trading, assignment occurs when an option contract is exercised. The owner of the contract exercises the contract and assigns the option writer to an obligation to complete the requirements of the contract.
- 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.
Property Rights Assignment
Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, etc. to another entity through a written agreement. For example, a payee assigns rights for collecting note payments to a bank. A trademark owner transfers, sells, or gives another person interest in the trademark. 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 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 can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price . The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer's rights. This is known as an option assignment.
Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option ) or buy (if a put option ) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away . For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.
Suppose a trader owns 100 call options on company ABC's stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.
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What is an Assignment in Options?
How does assignment work, what does “write an option” mean, how do you know if an option position will be assigned, what happens after an option is assigned, short put vs. short call, option assignment examples, option assignment summed up, supplemental content, what is an option assignment & how does it work.
Options assignment refers to the process in which the obligations of an options contract are fulfilled. This happens when the holder of an options contract decides to exercise their rights.
When an option holder decides to exercise, the Options Clearing Corporation (OCC) will randomly assign the exercise notice to one of the option writers.
A call option gives the holder the right to buy an underlying asset at a specified price (the strike price) within a certain period. If the holder decides to exercise a call option, the seller (writer) of the option is obligated to sell the underlying asset at the strike price. In this case, the option seller is said to be "assigned."
A put option gives the holder the right to sell an underlying asset at a specified price within a certain period. If the holder decides to exercise a put option, the seller of the option is obligated to buy the underlying asset at the strike price. Again, the option seller is "assigned" in this scenario.
Importantly, being assigned on an option can lead to significant financial obligations, particularly if the option writer does not already own the underlying asset for a call option (known as a naked call) or does not have the cash to buy the underlying asset for a put option. Therefore, option writers should be prepared for the possibility of assignment.
Options assignment works in tandem with the exercise of an options contract. It's the process of fulfilling the obligations of the options contract when the option holder decides to exercise their rights.
In general, the options assignment process includes four steps, as outlined below:
Option Exercise : The holder of the option (the investor who purchased the option) decides to exercise the option. This decision is typically made when it is beneficial for the option holder to do so. For example, if the market price of the underlying asset is favorable compared to the strike price in the option contract.
Notification : When the option is exercised, the Options Clearing Corporation (OCC) is notified. The OCC then selects a member brokerage firm, which in turn chooses one of its clients who has written (sold) an options contract of the same series (same underlying asset, strike price, and expiration date) to be assigned.
Assignment : The selected option writer (the investor who sold the option) is then assigned by the brokerage. The assignment means that the option writer now has the obligation to fulfill the terms of the options contract.
Fulfillment : If it was a call option that was exercised, the assigned writer must sell the underlying asset to the option holder at the agreed-upon strike price. If it was a put option that was exercised, the assigned writer must buy the underlying asset from the option holder at the strike price.
Writing an option refers to the act of selling an options contract.
This term is used because the seller is essentially creating (or "writing") a new contract that gives the buyer the right, but not the obligation, to buy or sell a security at a predetermined price within a specific period.
There are two types of options that investors/traders can write: a call option or a put option. Further details for each are outlined below:
Writing a Call Option : This process involves selling someone the right to buy a security from you at a specified price (the strike price) before the option expires. If the buyer decides to exercise their right, you, as the writer, must sell them the security at that strike price, regardless of the market price. If you don't own the underlying security, this is known as writing a naked call, which can involve substantial risk.
Writing a Put Option : This process involves selling someone the right to sell a security to you at a specified price before the option expires. If the buyer decides to exercise their right, you, as the writer, must buy the security from them at that strike price, regardless of the market price.
When an investor/trader writes an option, he/she receives the option’s premium from the buyer. This premium is theirs to keep, regardless of whether the option is exercised.
However, writing options can be a highly risky endeavor, so investors and traders should be aware of these risks (and accept) them, prior to engaging in options writing activity.
For call options, if the market price goes much higher than the strike price, the option writer (i.e. seller) is still obligated to sell at the lower strike price. For put options, if the market price goes significantly lower than the strike price, the option writer (i.e. seller) must buy the asset at the higher strike price, potentially resulting in a loss.
As such, writing options (i.e. selling options) is typically reserved for experienced investors/traders who are comfortable with the risks involved.
It’s impossible to know for certain if a given option will be assigned.
However, there are several situations in which an option assignment becomes more likely, as detailed below:
In-the-money (ITM) Options : An option is more likely to be exercised, and therefore assigned, if it's in the money . That means the market price of the underlying asset is above the strike price for a call option, or below the strike price for a put option. This is because exercising the option in such a scenario would be profitable for the option holder.
Near Expiration : Options are also more likely to be exercised as they approach their expiration date, particularly if they are in the money. This is because the time value of the option (a component of its price) diminishes as the option nears expiration, leaving only the intrinsic value (the difference between the market price of the underlying asset and the strike price).
Dividend Payments : For call options, if the underlying security is due to pay a dividend, and the amount of the dividend is larger than the time value remaining in the option's price, it might make sense for the holder to exercise the option early to capture the dividend. This could lead to early assignment for the writer of the option.
Remember, even if the above scenarios exist, it does not guarantee assignment, as the option holder might not choose to exercise the option. The decision to exercise is entirely up to the option holder.
Therefore, when writing (i.e. selling) options, investors and traders should be prepared for the possibility of assignment at any time until the option expires.
Remember, as the writer of the option, you receive and keep the premium regardless of whether the option is exercised or not. But this premium may not be sufficient to offset any loss from the assignment. That's why writing options involves risk and requires careful consideration.
1. Call Option Assignment:
Imagine a scenario in which you've written (sold) a call option for ABC stock. The call option has a strike price of $60 and the expiration date is in one month. For selling this option, you've received a premium of $5.
Now, let's say the stock price of ABC stock shoots up to $70 before the expiration date. The option holder can choose to exercise the option since it is now "in-the-money" (the current stock price is higher than the strike price). If the option holder decides to exercise their right, you, as the writer, are then assigned.
Being assigned means you have to sell ABC shares to the option holder for the strike price of $60, even though the current market price is $70. If you already own the ABC shares, then you simply deliver them. If you don't own them, you must buy the shares at the current market price ($70) and sell them at the strike price ($60), incurring a loss.
2. Put Option Assignment:
Suppose you've written a put option for XYZ stock. The put option has a strike price of $50 and expires in one month. You receive a premium of $5 for writing this option.
Now, if the stock price of XYZ stock drops to $40 before the option's expiration date, the option holder may choose to exercise the option since it's "in-the-money" (the current stock price is lower than the strike price). If the holder exercises the option, you, as the writer, are assigned.
Being assigned in this scenario means you have to buy XYZ shares from the option holder at the strike price of $50, even though the current market price is $40. This means you pay more for the stock than its current market value, incurring a loss.
What does an option assignment mean?
What happens when a call is assigned.
If it was a call option that was exercised, the assigned writer must sell the underlying asset to the option holder at the agreed-upon strike price.
What happens when a short option is assigned?
How often do options get assigned.
The frequency with which options get assigned can vary significantly, depending on a number of factors. These can include the type of option, its moneyness (whether it's in, at, or out of the money), time to expiration, volatility of the underlying asset, and dividends.
According to FINRA , 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 options positions assigned.
How often do options get assigned early?
According to FINRA , only 7% of all options are exercised, which indicates that early assignment options constitute an even lower percentage of the total than 7%.
How late can options be assigned?
In most cases, options can be exercised (and thus assigned to the writer) at any time up to the expiration date for American style options. However, the exact timing can depend on the rules of the specific exchange where the option is traded.
Typically, the holder of an American style option has until the close of business on the expiration date to decide whether to exercise it. Once the decision is made and the exercise notice is submitted, the Options Clearing Corporation (OCC) randomly assigns the exercise notice to one of the member brokerage firms with clients who have written (sold) options in the same series. The brokerage firm then assigns one of its clients.
Do I keep the premium if I get assigned?
As the writer of the option, you receive and keep the premium regardless of whether the option is exercised or not. But this premium may not be sufficient to offset any loss from the assignment. That's why writing options involves risk and requires careful consideration.
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How Option Assignment Works: Understanding Options Assignment
May 26, 2023 — 08:00 am EDT
Written by [email protected] for Schaeffer ->
Options assignment is a process in options trading that involves fulfilling the obligations of an options contract.
It occurs when the buyer of an options contract exercises their right to buy or sell the underlying asset. The seller (writer) of the options contract must deliver or receive the underlying asset at the agreed-upon price (strike price).
What is Options Assignment?
Options assignment can happen when the owner of an option exercises their right to buy or sell shares of stock or when options expire in the money (ITM). This process can be complex and involves various factors such as the type of option, expiration date, and market conditions.
There are two main styles of options contracts: American-style and European-style. American-style options allow the buyer of a contract to exercise at any time during the life of the contract. In contrast, European-style options can only be exercised on the expiration date.
Traders selling American-style options are at risk of assignment anytime on or before the expiration date. While they can technically be assigned anytime, the option must be ITM for the owner of the contract to benefit from exercising their right.
On the other hand, many options traders prefer to sell European-style options as it is impossible to be assigned before the expiration date, giving them more flexibility to hold their contract without worrying about being assigned early.
Who is at Risk of Assignment in Options Trading?
Traders with short options positions are at risk of assignment because they have sold the option and are obligated to deliver or receive the underlying asset. If the owner of the options contract decides to exercise their rights, the seller of the options contract must fulfill their obligations.
Traders with long options positions are not at risk of assignment as they are in control of exercising their options. A long option holder has the right, but not the obligation, to buy or sell the underlying asset at the strike price. If the long option holder decides not to exercise their options, they can let the options contract expire worthless.
What is the Risk of Assignment?
The risks associated with options assignment are primarily centered around the obligations of the seller of the options contract. If the holder of the options contract decides to exercise their right to buy or sell the underlying asset, the seller must fulfill their obligations.
For example, if a trader sold a put option with a $100 strike price, and the stock dropped to $90, they would still have to buy the stock at $100 per share. When an option is ITM, it generally indicates that the seller of the option is in an unfavorable spot.
Of course, if you sold a $100 strike put option when the stock was trading at $120, and now it is trading at $90, the seller is likely regretting their original trade. However, it is impossible always to time the market perfectly, and assignment risk is the risk option sellers must assume.
Traders must be aware of market conditions that could increase the risk of assignment, such as large price movements in the underlying asset. Option selling strategies benefit from a stable market environment, so you must ensure the stock you are trading will remain stable until the expiration date. Events that may cause significant market volatility, such as earnings, are crucial to be aware of when selling options.
How to Avoid Option Assignment
While it may not be possible to avoid options assignment completely, there are several strategies that options traders can use to reduce the likelihood of being assigned.
One strategy is to manage short options positions by closing the position if your strike gets tested. For example, if you sold a $100 strike put when a stock is trading at $120 per share, you can avoid assignment by closing the position before the stock drops under your strike price of $100.
Another strategy is to roll over your option, which means you close it out and simultaneously sell a new contract with a different strike price and/or date. Traders can roll their contracts to the same strike price at a further date or even roll it down or up to ensure their contract stays out of the money (OTM).
These strategies may not always be effective in avoiding assignment. Traders should always be prepared to fulfill their obligations if they are assigned and have a plan to manage their positions accordingly. If a stock moves hard overnight, there is no guarantee you will successfully avoid assignment.
Do You Keep the Premium if You Get Assigned?
Yes, if you get assigned on a short options position, you still keep the premium you received initially. However, it is important to note that if you are assigned, you will also be obligated to fulfill the contract terms by buying or selling the underlying asset at the strike price. This means you may incur additional costs associated with fulfilling your obligation, such as purchasing the underlying asset at an unfavorable price.
What Happens When Your Covered Call Gets Assigned?
If a covered call gets assigned, the seller of the call option must sell the underlying stock at the strike price to the buyer of the call option. The seller will still be able to keep the premium received from the sale of the call option.
For example, if you own a stock at $100 per share and sell a $130 strike call option, you will be forced to sell if the stock is above $130 on the expiration date. Additionally, you can be assigned before the expiration date if the stock is trading above your strike price.
While the covered call seller will still generate a profit from this trade, the downside is you are likely missing out on more upside potential had you not sold the covered call. The seller of the covered call doesn’t have to do anything, as the broker will take care of the assignment for you.
Are Options Automatically Assigned?
If you are an option seller, your option will either be exercised by the buyer or automatically assigned if it is ITM on the expiration date.
If you are an option buyer, your option will not be automatically assigned before expiration. However, most brokers will automatically assign ITM options on the expiration date.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Help & FAQs
What is options assignment.
An options assignment is when the options seller must fulfil the obligation of an options contract by either selling or buying the underlying security at the exercise price. This is due to the buyer of an options contract exercising their right to buy/sell the underlying security.
ASX Clear randomly selects (assigns) a seller of the contract to complete the obligations of the contract as follows:
- Call sellers will sell the underlying stock at the exercise price.
- Put sellers will buy the underlying stock at the exercise price.
If you are assigned on a Call Option and do not hold the underlying stock, you must purchase the required units no later than 2:00pm Sydney time on the following trading day.
Please Note: In the event that the required units have not been purchased, CommSec may purchase the outstanding units at their discretion. CommSec will not be held liable for market movements of the underlying stock.
If you are assigned an Index Option, you must supply the cash settlement amount on the first ASX settlement day after expiry.
For further assistance on options assignment, please call the CommSec Options Desk on 1800 245 698 (8am to 5:30pm, Monday to Friday, Sydney time).
- What's the difference between a Call and Put option?
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More ways to get help
How can i tell when i will be assigned.
You can never tell when you will be assigned. Once you sell an American-style option (put or call), you have the potential for assignment to fulfill your obligation to receive (and pay for) or deliver (and are paid for) shares of stock on any business day. In some circumstances, you may be assigned on a short option position while the underlying shares are halted for trading, or perhaps while they are the subjects of a buyout or takeover.
To ensure fairness in the distribution of equity and index option assignments, OCC utilizes a random procedure to assign exercise notices to clearing member accounts maintained with OCC. The assigned firm must then use an exchange-approved method (usually a random process or the first-in, first-out method) to allocate notices to its accounts that are short the options.
Some generalizations might help you understand likelihood of assignment on a short-option position:
- Option holders only exercise about 7% of options. The percentage hasn't varied much over the years. That does not mean that you can only be assigned on 7% of your short option. It means that, in general, option exercises are not that common.
- The majority of option exercises (and the corresponding assignments) occurs as the option gets closer to expiration. It usually doesn't make sense to exercise an option, which has any time premium over intrinsic value. For most options, that doesn't occur until close to expiration.
- In general terms, an investor is more likely to exercise a put that goes in-the-money than a call that goes in-the-money. Why? Think about the result of an exercise. An investor who exercises a put uses it to sell shares and receive cash. A person exercising a call option uses it to buy shares and must pay cash. Option holders are more likely to exercise options if it means they can receive cash sooner. The opposite is true for calls, where exercise means you have to pay cash sooner.
The bottom line is that you really don't have any sure-fire way to predict when you will be assigned on a short option position. It can happen any day the stock market is open for trading.
Could I be assigned if my covered calls are in-the-money?
If i am short a call option (on a covered write) and i buy back my short call, is it possible for..., if i am short a call option (on a covered write) and i buy back my short call, is it possible for me to be assigned (and the stock position to be called away) that night, i sold short 10 options contracts recently. unfortunately, i was assigned early on each contract..., i sold short 10 options contracts recently. unfortunately, i was assigned early on each contract, one at a time. couldn't all the contracts have been assigned at once, are options automatically assigned when they are in-the-money at expiration is there a way that..., are options automatically assigned when they are in-the-money at expiration is there a way that i can avoid assignment.
OCC encourages all investors to inform their brokerage firm of their exercise intentions for their long options at expiration. While each firm may have their own thresholds, OCC employs an administrative procedure where options that are $.01 in-the-money are exercised unless contrary instructions are provided. Customers and brokers should check with their firm's operations department to determine their company's policies regarding exercise thresholds.
An option holder has the right to exercise their option regardless of the price of the underlying security. It is a good practice for all option holders to express their exercise (or non-exercise) instructions to their broker. Is there a magic number that ensures that option writers will not be assigned? No. Although unlikely, an investor may choose to exercise a slightly out-of-the-money option or choose not to exercise an option that is in-the-money by greater than $.01.
Some investors use the saying, "when in doubt, close them out.” This means that if they buy back any short contracts, they are no longer at risk of assignment.
I wrote a slightly out-of-the-money covered call. The call has since moved in-the-money. Is there...
I wrote a slightly out-of-the-money covered call. the call has since moved in-the-money. is there any way to avoid assignment on that short call, if i buy-to-close a short option position, how can i be sure i will not be assigned.
You will want to first check with your broker to ensure that an assignment has not already occurred.
Because OCC processes closing buy transactions before exercises, there is no possibility of being assigned on positions that were closed during that day's trading hours.
When I sell an option to open, is my only chance of assignment (and being required to fulfill my...
When i sell an option to open, is my only chance of assignment (and being required to fulfill my obligations as the option writer) when the person or entity that bought from me decides to exercise.
No. There are several reasons why this is untrue. First, the buy side of your opening sale could have been a closing purchase by someone who was already short the option. Second, OCC allocates assignments randomly. Anyone short that particular option is at risk of assignment when an option holder decides to exercise. Third, assuming the other side of your trade was an opening purchase, they may sell to close at any time but since you are still short, you are at risk of assignment.
As long as you keep a short option position open, you are at risk of assignment. Assignment risk increases as the option becomes deeper in-the-money and as expiration approaches (the option trades with less time premium). Assignment risk also increases just before the ex-dividend date for short calls and just after the ex-dividend date for short puts.
At expiration, OCC exercises all equity options that are in-the-money by $.01 or more unless the option holder instructs their broker not to exercise or the stock has been removed from OCC’s exercise-by-exception processing.
The exchanges recently halted trading on a stock where I’m short puts. Am I still obligated to...
The exchanges recently halted trading on a stock where i’m short puts. am i still obligated to purchase the security if assigned.
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Options Exercise, Assignment, and More: A Beginner's Guide
So your trading account has gotten options approval, and you recently made that first trade—say, a long call in XYZ with a strike price of $105. Then expiration day approaches and, at the time, XYZ is trading at $105.30.
Wait. The stock's above the strike. Is that in the money 1 (ITM) or out of the money 2 (OTM)? Do I need to do something? Do I have enough money in my account? Help!
Don't be that trader. The time to learn the mechanics of options expiration is before you make your first trade.
Here's a guide to help you navigate options exercise 3 and assignment 4 —along with a few other basics.
In the money or out of the money?
The buyer ("owner") of an option has the right, but not the obligation, to exercise the option on or before expiration. A call option 5 gives the owner the right to buy the underlying security; a put option 6 gives the owner the right to sell the underlying security.
Conversely, when you sell an option, you may be assigned—at any time regardless of the ITM amount—if the option owner chooses to exercise. The option seller has no control over assignment and no certainty as to when it could happen. Once the assignment notice is delivered, it's too late to close the position and the option seller must fulfill the terms of the options contract:
- A long call exercise results in buying the underlying stock at the strike price.
- A short call assignment results in selling the underlying stock at the strike price.
- A long put exercise results in selling the underlying stock at the strike price.
- A short put assignment results in buying the underlying stock at the strike price.
An option will likely be exercised if it's in the option owner's best interest to do so, meaning it's optimal to take or to close a position in the underlying security at the strike price rather than at the current market price. After the market close on expiration day, ITM options may be automatically exercised, whereas OTM options are not and typically expire worthless (often referred to as being "abandoned"). The table below spells it out.
- If the underlying stock price is...
- ...higher than the strike price
- ...lower than the strike price
- If the underlying stock price is... A long call is...
- ...higher than the strike price ...ITM and typically exercised
- ...lower than the strike price ...OTM and typically abandoned
- If the underlying stock price is... A short call is...
- ...higher than the strike price ...ITM and typically assigned
- If the underlying stock price is... A long put is...
- ...higher than the strike price ...OTM and typically abandoned
- ...lower than the strike price ...ITM and typically exercised
- If the underlying stock price is... A short put is...
- ...lower than the strike price ...ITM and typically assigned
The guidelines in the table assume a position is held all the way through expiration. Of course, you typically don't need to do that. And in many cases, the usual strategy is to close out a position ahead of the expiration date. We'll revisit the close-or-hold decision in the next section and look at ways to do that. But assuming you do carry the options position until the end, there are a few things you need to consider:
- Know your specs . Each standard equity options contract controls 100 shares of the underlying stock. That's pretty straightforward. Non-standard options may have different deliverables. Non-standard options can represent a different number of shares, shares of more than one company stock, or underlying shares and cash. Other products—such as index options or options on futures—have different contract specs.
- Stock and options positions will match and close . Suppose you're long 300 shares of XYZ and short one ITM call that's assigned. Because the call is deliverable into 100 shares, you'll be left with 200 shares of XYZ if the option is assigned, plus the cash from selling 100 shares at the strike price.
- It's automatic, for the most part . If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, there's something called a do not exercise (DNE) request that a long option holder can submit if they want to abandon an option. In such a case, it's possible that a short ITM position might not be assigned. For more, see the note below on pin risk 7 ?
- You'd better have enough cash . If an option on XYZ is exercised or assigned and you are "uncovered" (you don't have an existing long or short position in the underlying security), a long or short position in the underlying stock will replace the options. A long call or short put will result in a long position in XYZ; a short call or long put will result in a short position in XYZ. For long stock positions, you need to have enough cash to cover the purchase or else you'll be issued a margin 8 call, which you must meet by adding funds to your account. But that timeline may be short, and the broker, at its discretion, has the right to liquidate positions in your account to meet a margin call 9 . If exercise or assignment involves taking a short stock position, you need a margin account and sufficient funds in the account to cover the margin requirement.
- Short equity positions are risky business . An uncovered short call or long put, if assigned or exercised, will result in a short stock position. If you're short a stock, you have potentially unlimited risk because there's theoretically no limit to the potential price increase of the underlying stock. There's also no guarantee the brokerage firm can continue to maintain that short position for an unlimited time period. So, if you're a newbie, it's generally inadvisable to carry an options position into expiration if there's a chance you might end up with a short stock position.
A note on pin risk : It's not common, but occasionally a stock settles right on a strike price at expiration. So, if you were short the 105-strike calls and XYZ settled at exactly $105, there would be no automatic assignment, but depending on the actions taken by the option holder, you may or may not be assigned—and you may not be able to trade out of any unwanted positions until the next business day.
But it goes beyond the exact price issue. What if an option is ITM as of the market close, but news comes out after the close (but before the exercise decision deadline) that sends the stock price up or down through the strike price? Remember: The owner of the option could submit a DNE request.
The uncertainty and potential exposure when a stock price and the strike price are the same at expiration is called pin risk. The best way to avoid it is to close the position before expiration.
The decision tree: How to approach expiration
As expiration approaches, you have three choices. Depending on the circumstances—and your objectives and risk tolerance—any of these might be the best decision for you.
1. Let the chips fall where they may. Some positions may not require as much maintenance. An options position that's deeply OTM will likely go away on its own, but occasionally an option that's been left for dead springs back to life. If it's a long option, the unexpected turn of events might feel like a windfall; if it's a short option that could've been closed out for a penny or two, you might be kicking yourself for not doing so.
Conversely, you might have a covered call (a short call against long stock), and the strike price was your exit target. For example, if you bought XYZ at $100 and sold the 110-strike call against it, and XYZ rallies to $113, you might be content selling the stock at the $110 strike price to monetize the $10 profit (plus the premium you took in when you sold the call but minus any transaction fees). In that case, you can let assignment happen. But remember, assignment is likely in this scenario, but it is not guaranteed.
2. Close it out . If you've met your objectives for a trade, then it might be time to close it out. Otherwise, you might be exposed to risks that aren't commensurate with any added return potential (like the short option that could've been closed out for next to nothing, then suddenly came back into play). Keep in mind, there is no guarantee that there will be an active market for an options contract, so it is possible to end up stuck and unable to close an options position.
The close-it-out category also includes ITM options that could result in an unwanted long or short stock position or the calling away of a stock you didn't want to part with. And remember to watch the dividend calendar. If you're short a call option near the ex-dividend date of a stock, the position might be a candidate for early exercise. If so, you may want to consider getting out of the option position well in advance—perhaps a week or more.
3. Roll it to something else . Rolling, which is essentially two trades executed as a spread, is the third choice. One leg closes out the existing option; the other leg initiates a new position. For example, suppose you're short a covered call on XYZ at the July 105 strike, the stock is at $103, and the call's about to expire. You could attempt to roll it to the August 105 strike. Or, if your strategy is to sell a call that's $5 OTM, you might roll to the August 108 call. Keep in mind that rolling strategies include multiple contract fees, which may impact any potential return.
The bottom line on options expiration
You don't enter an intersection and then check to see if it's clear. You don't jump out of an airplane and then test the rip cord. So do yourself a favor. Get comfortable with the mechanics of options expiration before making your first trade.
1 Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the stock price is above the strike price. A put option is ITM if the stock price is below the strike price. For calls, it's any strike lower than the price of the underlying equity. For puts, it's any strike that's higher.
2 Describes an option with no intrinsic value. A call option is out of the money (OTM) if its strike price is above the price of the underlying stock. A put option is OTM if its strike price is below the price of the underlying stock.
3 An options contract gives the owner the right but not the obligation to buy (in the case of a call) or sell (in the case of a put) the underlying security at the strike price, on or before the option's expiration date. When the owner claims the right (i.e. takes a long or short position in the underlying security) that's known as exercising the option.
4 Assignment happens when someone who is short a call or put is forced to sell (in the case of the call) or buy (in the case of a put) the underlying stock. For every option trade there is a buyer and a seller; in other words, for anyone short an option, there is someone out there on the long side who could exercise.
5 A call option gives the owner the right, but not the obligation, to buy shares of stock or other underlying asset at the options contract's strike price within a specific time period. The seller of the call is obligated to deliver, or sell, the underlying stock at the strike price if the owner of the call exercises the option.
6 Gives the owner the right, but not the obligation, to sell shares of stock or other underlying assets at the options contract's strike price within a specific time period. The put seller is obligated to purchase the underlying security at the strike price if the owner of the put exercises the option.
7 When the stock settles right at the strike price at expiration.
8 Margin is borrowed money that's used to buy stocks or other securities. In margin trading, a brokerage firm lends an account owner a portion of the purchase price (typically 30% to 50% of the total price). The loan in the margin account is collateralized by the stock, and if the value of the stock drops below a certain level, the owner will be asked to deposit marginable securities and/or cash into the account or to sell/close out security positions in the account.
9 A margin call is issued when your 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 a customer exceeds their buying power. Margin calls may be met by depositing funds, selling stock, or depositing securities. Charles Schwab may forcibly liquidate all or part of your account without prior notice, regardless of your intent to satisfy a margin call, in the interests of both parties.
Just getting started with options?
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Ex-Dividend Dates: Understanding Dividend Risk
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. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received.
Short options can be assigned at any time up to expiration regardless of the in-the-money amount.
Investing involves risks, including loss of principal. Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against loss.
Commissions, taxes, and transaction costs are not included in this discussion but can affect final outcomes 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.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Short selling is an advanced trading strategy involving potentially unlimited risks and must be done in a margin account. Margin trading increases your level of market risk. For more information, please refer to your account agreement and the Margin Risk Disclosure Statement.