options assignment time

Options Assignment: Navigating the Rights and Obligations

By Tyler Corvin

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

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

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

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

What you’ll learn

What is Options Assignment?

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

Conclusion

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

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

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

There are two main types of option assignments:

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

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

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

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

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

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

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

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

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

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

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

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

Navigating the Post-Assignment Terrain

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

For the Option Seller:

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

For the Option Buyer:

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

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

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

Call Option Assignment Scenario

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

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

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

Put Option Assignment Scenario

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Understanding Options Assignment: FAQs

What factors influence the likelihood of an option being assigned.

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

Are Some Option Styles More Prone to Assignment than Others?

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

How Do Current Market Trends Impact Assignment Risk?

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

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

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

Are There Any Fees Tied to Option Assignments?

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

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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.

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News & Insights

Options Basics: How the Option Assignment Process Works

July 23, 2021 — 12:46 pm EDT

Written by [email protected] for Schaeffer ->

There is a lot of technical jargon that is specific to the options market. For a beginner who is aiming to learn how to trade options, understanding these technical terms is crucial to optimizing trading results. One phrase that is a critical part of this options trading language is “assignment.” Simply defined, the assignment of an option refers to the fulfillment of the options contract by the seller. An option holder has the right to buy or sell the underlying equity at the given strike price. Once the holder decides to exercise the option, the option is said to be “assigned.” If a trader sells options, he must be aware of the assignment process and the risks it entails. We recommend subscribing to one of Schaeffer's options trading newsletters to gain the ultimate insights into the language of the options market while making money, too.

What Does it Mean to Write an Option?

When an options seller writes an options contract, this is known as a “sell to open” trade, as he is essentially opening a new position. As the trader is selling the option to open this position, he is technically said to be “short” that underlying stock. The seller accepts a responsibility to sell or buy the underlying security in lieu of a premium received from the buyer. As a general rule, an option holder can exercise his rights any time before the contract expires. In order to learn to trade options, it is necessary to grasp this structure of corresponding rights and duties. It's important to also note that most options are exercised when they are nearing expiry because, after that, the options contract is worthless.

How Does the Option Assignment Process Work?

The assignment process is done at random by the Options Clearing Corporation (OCC) . A trader will become more acquainted with the operations of the OCC as he or she learns to trade options. When a buyer exercises his option, the OCC will randomly connect them with a brokerage that is short on options of that equity. Due to the lottery-like nature of the process, it is almost impossible to predict when an investor’s option may be assigned.

2 Categories of Options to Understand

As a brief summary, let’s go over the two basic categories of options. These categories and their respective merits become apparent as one learns to trade options. In a call option, the option holder possesses the right to buy the security before the contract expires. In this scenario, the seller’s obligation is to sell the option upon assignment.

The inverse of this is the put option. In this category, the holder has the right to sell to the security at the contract price. The consequence of this is that upon assignment, the seller must purchase the security at the strike price. If an investor does not own the stock, he must first buy it. After this, he must deliver it to the holder.

Initially, a seller has an edge in the options trading process. He starts with a net benefit as a premium is paid to him by the buyer without him giving any monetary return immediately. If an option is never exercised, the seller actually retains the premium if the contract expires.

However, the issues arise as the contract nears its expiry, as the chances of assignment increase exponentially. The problem for investors when called to assign are three-fold: 1) they have no control over when the option is exercised, 2) they must fulfill their end of the bargain irrespective of whether this could lead to a loss or a low gain, and 3) even if the underlying stock is not trading, in a call option the deliver the stock to the buyer.

Can an Options Seller Predict When an Option Will Be Exercised?

It would be misleading if we were say there is some magic formula that we could use to predict when an option will be exercised. Traders will understand how frequent assignment occurs once they more completely learn to trade options. However, a general statistic is that approximately 7% of options are actually ever exercised. Even though, technically, an option can be assigned any time while the contract remains open, option holders usually exercise their option near its expiration date. This is because traders usually wait to find the ideal time and observe trading prices. As you learn to trade options, you will realize that very few buyers ever exercise options ahead of expiration.

When is Options Assignment Less Likely?

Even though we cannot accurately predict when an option will be exercised, there are certain indicators traders can use. These indicators are easier to see when you learn to trade options and observe market trends.

An assignment is less probable when an option is out-of-the-money. An option is out-of-the-money when the security is trading at a higher value in the market as compared to the strike price. It is rarely recommended to sell an option that is out-of-the-money. This is because if the strike price is lower than the market value, the option holder will make a loss on the contract. If the strike price is $30, and the market value is $20 and the holder exercises the call option, they will end up taking a loss since they are buying it at a higher price. As investors learn to trade options, they can better predict the time of assignment with greater accuracy.

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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Options Assignment

How can i tell when i will be assigned.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Option Assignment Process

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

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

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

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

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

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

When Assignment Occurs

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

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

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

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

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

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

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

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

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

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

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

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

When You Are Most At Risk

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

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

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

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

Situation 2: The option has an upcoming dividend

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

Situation 3: There is no extrinsic value left

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

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

How You Can Avoid The Risk Of Being Assigned

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trade safe!

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

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What Is an Option Assignment?

Definition and Examples of Assignment

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

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

Key Takeaways

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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How dividends can increase options assignment risk

Most experienced investors are familiar with the adage that "if an investment opportunity sound too good to be true, it probably is." While this sentiment may often be associated with overly optimistic assumptions, it also applies to investors who sell options contracts without first considering the ex-dividend date for a stock or ETF.

How dividends work

A quick review of how dividends work: A dividend represents a payment of a company's revenues to shareholders, most often in the form of cash. Cash dividends are paid out on a per-share basis. For example, if you own 100 shares of a stock that pays a $0.50 quarterly dividend, you will receive $50.

Not all companies pay dividends, but if you're investing in options contracts for companies that do pay them, you need to keep several important dates in mind:

Declaration date: Date on which a company announces the per-share amount of its next dividend.
Record date: The cut-off date established by the company to determine which shareholders of its stock are eligible to receive a distribution. This is usually, but not always, 1 day after the ex-dividend date.
Ex-Dividend date: Date on which a stock's price adjusts downward to reflect its next dividend payment. For example, if a stock pays a $0.50 dividend, the stock price will drop by a half point prior to trading on the ex-dividend date. If you buy a stock on or after the ex-dividend date, you are not entitled to the next dividend.
Dividend (payment) date: Date shareholders receive cash in their account from a dividend.

See Locating dividend information for stocks for additional details.

Dividends offer an effective way to earn income from your equity investments. However, call option holders are not entitled to regular quarterly dividends, regardless of when they purchase their options. And, unlike stock or ETF prices, options contract prices are not adjusted downward on ex-dividend dates.

This can cause a problem for anyone who has sold an options contract without first considering the impact of dividends. Why? Because the risk of being assigned on an option contract is higher when the underlying security of an in-the-money option starts trading ex-dividend. To understand the risks and how dividends impact options contracts, let's explore some potential scenarios.

Avoiding or managing early assignment on covered calls

As noted above, the ex-dividend date is particularly important to anyone who writes a covered or uncovered call option. If a covered call option you have sold is in the money and the dividend exceeds the remaining time value of the option, there is a good chance an owner of those calls will exercise his options early.

If you are assigned, you must deliver your shares of the underlying security, as well as the dividend income, to the owner of the call. Let's examine a hypothetical example to illustrate how this works.

Bob owns 500 shares of ABC stock, which pays a quarterly $0.50 dividend.
The stock is trading around $25 a share on August 1 when Bob decides to sell 5 October 30 calls.
By early October, ABC stock has risen to $31 and, as a result, Bob's covered calls are in the money by $1. The calls will expire in 10 days and tomorrow the stock will start trading ex-dividend.
Because the remaining time value of the call option is less than the value of the dividends, the call owner will likely exercise his options on the day before the ex-dividend date.

See Locating option values in Active Trader Pro ® .

If Bob does not take any action to close his covered call position, there is a good chance he will be assigned on the ex-dividend date. This means he will no longer own 500 shares of the stock and he will not receive the dividend income.

To avoid this scenario, Bob has a couple of choices:

He could buy back the calls he sold to retain the stock and the dividend. However, he would have to do this prior to the ex-dividend date. If he waits until the ex-dividend date or later, he will not be entitled to the dividend income. Keep in mind that it's possible to get assigned prior to the day before the ex-dividend date, so this strategy is not foolproof.
The other option is to close out his short position and write a new covered call with a later expiration date or a higher strike price. This strategy is known as "rolling" your options contract forward.

Avoiding or managing early assignment on calls not covered by shares

Now let's consider what could happen if Bob had sold uncovered calls on ABC stock:

As in the example above, ABC stock pays a quarterly $0.50 dividend and is trading around $25 a share
Bob has a negative view on the stock and decides to sell 5 uncovered October 30 calls
By early October, ABC stock has risen to $31 and, as a result, his uncovered calls are in the money by $1

To make matters worse, Bob learns that tomorrow the stock will start trading ex-dividend. Because the remaining time value of the options is less than the value of the dividends, owners of these calls will likely exercise their options 1 day prior to the ex-dividend date.

To limit his exposure, Bob has several choices. He can buy back his uncovered calls at a loss, buy the stock to capture the dividend, or sit tight and hope to not be assigned. If his calls are assigned, however, he will have to pay the $250 in dividend income, in addition to covering the cost of delivering 500 shares of ABC stock. If Bob had initiated an option spread (buying and selling an equal number of options of the same class on the same underlying security but with different strike prices or expiration dates), he could also consider exercising his long option position to capture the dividend.

Other considerations and risks

If you are implementing a spread strategy that includes long contracts and short contracts, you need to remain particularly vigilant in regard to assignment risk. If both contracts are in the money and you are assigned on the short contracts, you will not be notified until the following business day. While you can exercise your long position on the ex-dividend date to eliminate the short stock position that was created, you will still owe the dividend because you were short the stock prior to the ex-dividend date.

Ways to avoid the risk of early assignment

If you are selling options (covered or uncovered), there is always the risk of being assigned if your trade moves against you. This risk is higher if the underlying security involved pays a dividend. However, there are ways to reduce the likelihood of being assigned early. These include:

Do your homework: Know if the stock or ETF pays a dividend and when it will start trading ex-dividend
Avoid selling options on dividend-paying stocks or ETFs when your trade includes ex-dividend
Invest in European-style options: American-style options can be assigned at any time before the option expires, European-style options can only be exercised at expiration

See Locating dividend information for ETFs for details.

If you are a Fidelity customer and you have questions about your exposure to assignment risk, you can always contact a Fidelity representative for help.

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In an earlier era of options trading—two or three decades ago—for market makers in the options trading pits in Chicago and other financial centers, there was one day a month in which attendance was virtually mandatory: options expiration day. Volume was usually heavy, and the potential for volatility was ever-present. In short, trading options on expiration day was seen as a time of opportunity and risk.

Nowadays, however, with midweek and weekly options adding to the standard monthly and quarterly dates, options expiration happens every day of the week.

If you're new to options, and you don't quite understand all the terminology and logistics, expiration can also be a time of peril. Here are a few things you need to know to avoid potential pitfalls and better understand the ins and outs of expiration day.

Some basic lingo

Option holder . The buyer ("owner") of an American-style option has the right, but not the obligation, to exercise the option on or before expiration. A call option gives the owner the right to buy the underlying security; a put option gives the owner the right to sell the underlying security.
Multiplier . When an option holder buys a put or call, they pay a premium, and to arrive at the total cost of an options contract, the premium is typically by 100 (exceptions may exist with some non-standard options contracts). For example, if an option is trading for $1.40, the price of one contract, excluding fees, is $140, or $1.40 x 100 (multiplier) = $140.
Expiration . Each option has an expiration date, which is when the contract expires and ceases to exist.
Strike price . Each option also has a strike price, and if the contract is exercised, the underlying security is bought and sold at the strike price of the option.
Moneyness . Options can either be in the money (ITM), at the money (ATM), or out of the money (OTM). An ATM option has a strike price at or near the price of the underlying asset. A call option is ITM if the stock price is above the strike price (opposite for puts) and OTM if the stock price is below the strike price (reverse for puts).
Option writer . When you sell ("write") an American-style option (call or put), you may be assigned if the option is ITM on or before expiration day (and even OTM in special cases described below). The option seller has no control over assignment and no certainty as to when it could happen. Assignment on a short call means delivering shares out of the account and assignment on a short put means buying shares into the account.
Options intrinsic value . This is the difference between a strike and the underlying's current price. Suppose a stock is trading for $51 and a 50-strike call option is worth $1.40. The intrinsic value would be $1, the amount by which it's ITM. The extra $0.40 is known as extrinsic value, or time value. OTM options consist only of extrinsic value.

What are the terms? American or European? Cash or physical delivery?

American-style options can be exercised any time before the options expiration date, whereas European-style options can only be exercised at expiration. Standard U.S. equity options (options on single-name stocks) are American-style. Most options on stock indexes, such as the Nasdaq-100 ® (NDX), S&P 500 ® (SPX), and Russell 2000 ® (RUT), are European-style.

Also, standard equity options are not cash-settled—actual shares are transferred in an exercise/assignment. Broad-based indexes, however, are cash-settled in an amount equal to the difference between the settlement price and the strike price times the contract multiplier.

Also, standard equity options are not cash-settled—actual shares are transferred in an exercise/assignment. Options on broad-based indexes, however, are cash-settled in an amount equal to the difference between the settlement price of the index and the strike price of the option times the contract multiplier.

Settlement and triple witching

Each quarter, on the third Friday in March, June, September, and December, contracts for stock index futures, stock index options, and stock options all expire on the same day. This so-called "triple witching" may lead to greater trading activity and increased volatility.

Most index options, such as the SPX, NDX, and RUT, settle Friday morning but stop trading on Thursday afternoon (before the third Friday of the month). But the settlement price isn't computed until Friday morning. The monthly option AM settlement value isn't based on the opening price of the index, but rather on the price determined by the opening trade price in each stock that comprises the index. This is known as "the print."

What if a market-moving event happens between Thursday night and Friday morning? Print risk is the overnight risk in AM-settled options.

PM-settled options trade until the end of the day and settle based on the closing value of the underlying security or settlement value of the index. On the last trading day, trading in an expiring PM-settled option closes at 3 p.m. CT for options on single-name equities. Options on equity indexes (cash-settled) expire at 3:15 p.m. CT.

Did you know?

Expiring options will be automatically exercised if they're ITM by $0.01 or more as of the 3 p.m. CT price (for equity options) and 3:15 p.m. CT price (for options on indexes). In general, the option holder has until 4:30 p.m. CT on expiration day to exercise the contract. These times are set by the Options Clearing Corporation (OCC), the central clearing house for the options market. But some brokerage firms might have an earlier cutoff than the OCC threshold.

If your long option is ITM at expiration but your account doesn't have enough money to support the resulting long or short stock position, your broker may, at its discretion, choose not to exercise the option. This is known as DNE (do not exercise), and any gain you may have realized by exercising the option will be wiped out. DNEs can be submitted by any option holder and instruct the broker not to auto-exercise ITM options at expiration. A broker may also, at its discretion, close out (sell) the position without prior notice to you. Meanwhile, OTM options expire worthless.

Expiration checklist: Manage and monitor your expiration risk

Everybody loves a long weekend, but if you've ever taken an unwanted position into the weekend due to an options expiration mishap, that time between Friday expiration and the Monday open can feel like a painful, gut-wrenching eternity.

Now that you've been introduced to the lingo and logistics, here's a list of things to know, check, and perhaps double-check as you go into expiration.

Do your research . Are there news alerts like ex-dividend dates, earnings, or other announcements expected on a company in which you hold expiring options?

Check your specs . Do your options settle American- or European-style? Is settlement in the morning or afternoon? What are the trading hours? Does the underlying trade outside of regular market hours? For example, options that are ITM as of the close are typically automatically exercised, and OTM options aren't. However, if the price of the underlying changes after the close, you might have a short option go from OTM to ITM. The option holder may choose to exercise, leaving you with an unwanted (or at least unexpected) position. However, there is also no guarantee that an ITM short option you hold will be assigned.

Liquidate (or have enough cash on hand) . To avoid any margin calls or unwanted overnight or weekend exposure, make sure you plan ahead for any positions you might acquire on expiration. For example, to exercise a long equity call option, you need to have enough cash in your account to pay for the shares. Alternatively, if your account is approved for margin trading, you need to hold cash or securities to satisfy the "Reg T" margin requirement. If you're unsure, or if you don't want the position, liquidate the option before market close. Just remember, there’s no guarantee of a liquid market.

Leave yourself some time . Unlike some video games, in options trading, it's not always a good thing to be the last person standing. As you get closer to 3 p.m. CT on expiration day, liquidity can often dry up and bid/ask spreads may widen. So, if you're considering liquidating, or even rolling to another expiration date, sooner may be better.

Risks and rewards

Here's one final item for your expiration checklist: Know and understand your risk. The risk profile below shows an example of a long vertical call spread, which is created by being long the 90-strike call and short the 95-strike call. Note that if, at expiration, the price of the underlying is below the 90 strike, both options will likely expire worthless.

On the other hand, if the underlying is above $95 at expiration, then the spread will likely be closed without a resulting position in the underlying, as the $90-strike call is exercised, and the $95 strike is assigned (the stock is called at $90, then immediately sold at $95). However, there is no guarantee that the ITM 95-strike call will be assigned (if the holder submits a DNE request, for example), which could result in an unexpected long stock position at $90 per share.

Vertical call spread risk profile

For illustrative purposes only. Past performance does not guarantee future results.

But what about the area in between the strikes? And, in particular, what about those points of uncertainty right around the 90 and 95 strikes? Will you have a position, or won't you?

If the 90-strike call is ITM and the 95-strike call is OTM at expiration, the lower strike call will be subject to automatic exercise and the 95-strike call will likely expire worthless. Therefore, you'd buy the shares for $90 unless you close the position by selling the spread prior to expiration (or submit a DNE for the ITM call). If the underlying is at the points of uncertainty around the 90 and 95 strikes, and you don't want to exercise the contract or get assigned, then you'll likely want to try to close the spread before expiration or submit a DNE with your broker.

Now that you've been introduced to the language and logistics of expiration, you may be able to approach expiration with a greater understanding of the risks and how you might manage them. You might want to keep this checklist handy just in case.

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What is Options Assignment & How to Avoid It

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

Video Breakdown of Options Assignment

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

What is Assignment?

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

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

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

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

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

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

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

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

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

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

Hopefully, this example clarifies what assignment is.

Who Can Be Assigned?

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

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

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

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

Less than 10% of all options are exercised.

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

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

Who Risks being Assigned Early?

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

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

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

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

How can you Minimize Assignment Risk?

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

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

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

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

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

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

FAQs about Assignment

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

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

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

Check out my review of tastyworks

2. How does assignment affect your P&L?

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

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

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

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

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

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

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

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

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

4. How does assignment work for index options?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you very much in advance

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

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

Thanks! Johnson

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

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

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

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

You are very welcome

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

Thank you so much for the positive feedback!

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

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

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

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

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

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

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

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

He would receive a margin call

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Step Into Commodities: Trading Challenge

New to Futures?

This brochure provides an in-depth description of the exercise and assignment process for options on futures that trade on CME Group-designated contract markets:

Chicago Board of Trade (CBOT)
Chicago Mercantile Exchange (CME)
Commodity Exchange (COMEX)
New York Mercantile Exchange (NYMEX)

Contents include:

Preliminaries
Random Assignment
Pro Rata Assignment
The Role of the Clearing Member Firm
Timetables for Option Exercise and Assignment
Overview of contrary options exercise

Options on Futures

Information about the exercise and assignment process for options on futures on CME Group designated contract markets.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

CME Group is the world’s leading derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). Further information on each exchange's rules and product listings can be found by clicking on the links to CME , CBOT , NYMEX and COMEX .

The Mechanics of Option Trading, Exercise, and Assignment

Options were originally traded in the over-the-counter ( OTC ) market , where the terms of the contract were negotiated. The advantage of the OTC market over the exchanges is that the option contracts can be tailored: strike prices, expiration dates, and the number of shares can be specified to meet the needs of the option buyer. However, transaction costs are greater and liquidity is less.

Option trading really took off when the first listed option exchange — the Chicago Board Options Exchange ( CBOE )— was organized in 1973 to trade standardized contracts, greatly increasing the market and liquidity of options. The CBOE was the original exchange for options, but, by 2003, it has been superseded in size by the electronic International Securities Exchange (ISE), based in New York. Most options sold in Europe are traded through electronic exchanges. Other exchanges for options in the United States include: NYSE Euronext ( NYX ), and the NASDAQtrader.com .

Option exchanges are central to the trading of options:

they establish the terms of the standardized contracts
they provide the infrastructure — both hardware and software — to facilitate trading, which is increasingly computerized
they link together investors, brokers, and dealers on a centralized system, so that traders can from the best bid and ask prices
they guarantee trades by taking the opposite side of each transaction
they establish the trading rules and procedures

Options are traded just like stocks — the buyer buys at the ask price and the seller sells at the bid price . The settlement time for option trades is 1 business day ( T+1 ). However, to trade options, an investor must have a brokerage account and be approved for trading options and must also receive a copy of the booklet Characteristics and Risks of Standardized Options .

The option holder, unlike the holder of the underlying stock, has no voting rights in the corporation, and is not entitled to any dividends. Brokerage commissions , which are a little higher for options than for stocks, must also be paid to buy or sell options, and for the exercise and assignment of option contracts. Prices are usually quoted with a base price + cost per contract, usually ranging from $5 to $15 minimum charge for up to 10 contracts, with a lower per contract charge, typically $0.50 to $1.50 per contract, for more than 10 contracts. Most brokerages offer lower prices to active traders. Here are some examples of how option prices are quoted:

$9.99 + $0.75 per contract for online option trades
$9.99 + $0.75 per contract for online option trades; phone trades are $5 more, and broker-assisted trades are $25 more
$1.50 per contract with a minimum standard rate of $14.95, with several discounts for active traders
Sliding commission scale ranging from $6.99 + $0.75 per contract for traders making at least 1500 trades per quarter to $12.99 + $1.25 per contract for investors with less than $50,000 in assets and making fewer than 30 trades per quarter. $19.99 for exercise and assignments.

The Options Clearing Corporation (OCC)

The Options Clearing Corporation ( OCC ) is the counterparty to all option trades. The OCC issues, guarantees, and clears all option trades involving its member firms, including all U.S. option exchanges, and ensures that sales are transacted according to the current rules. The OCC is jointly owned by its member firms — the exchanges that trade options — and issues all listed options, and controls and effects all exercises and assignments. To provide a liquid market, the OCC guarantees all trades by acting as the other party to all purchases and sales of options.

The OCC, like other clearing companies, is the direct participant in every purchase and sale of an option contract. When an option writer or holder sells his contracts to someone else, the OCC serves as an intermediary in the transaction. The option writer sells his contract to the OCC and the option buyer buys it from the OCC.

The OCC publishes, at optionsclearing.com , statistics, news on options, and any notifications about changes in the trading rules, or the adjustment of certain option contracts because of a stock split or that were subjected to unusual circumstances, such as a merger of companies whose stock was the underlying security to the option contracts.

The OCC operates under the jurisdiction of both the Securities and Exchange Commission ( SEC ) and the Commodities Futures Trading Commission ( CFTC ). Under its SEC jurisdiction, OCC clears transactions for put and call options on common stocks and other equity issues, stock indexes, foreign currencies, interest rate composites and single-stock futures . As a registered Derivatives Clearing Organization ( DCO ) under CFTC jurisdiction, the OCC clears and settles transactions in futures and options on futures .

The Exercise of Options by Option Holders and the Assignment to Fulfill the Contract to Option Writers

When an option holder wants to exercise his option, he must notify his broker of the exercise, and if it is the last trading day for the option, the broker must be notified before the exercise cut-off time , which will probably be earlier than on trading days before the last day, and the cut-off time may differ for different option classes or for index options. Although policies differ among brokerages, it is the duty of the option holder to notify his broker to exercise the option before the cut-off time.

When the broker is notified, then the exercise instructions are sent to the OCC, which then assigns the exercise to one of its Clearing Members who are short in the same option series as is being exercised. The Clearing Member will then assign the exercise to one of its customers who is short in the option. The customer is selected by a specific procedure, usually on a first-in, first-out basis, or some other fair procedure approved by the exchanges. Thus, there is no direct connection between an option writer and a buyer.

To ensure contract performance, option writers are required to post margin, the amount depending on how much the option is in the money. If the margin is deemed insufficient, then the option writer will be subjected to a margin call. Option holders don't need to post margin because they will only exercise the option if it is in the money. Options, unlike stocks, cannot be bought on margin.

Because the OCC is always a party to an option transaction, an option writer can close out his position by buying the same contract back, even while the contract buyer retains his position, because the OCC draws from a pool of contracts with no connection to the original contract writer and buyer.

A diagram outlining the exercise and assignment of a call.

Example: No Direct Connection between Investors Who Write Options and those Who Buy Them

John Call-Writer writes an option that legally obligates him to provide 100 shares of Microsoft for the price of $30 until April, 2007. The OCC buys the contract, adding it to the millions of other option contracts in its pool. Sarah Call-Buyer buys a contract that has the same terms that John Call-Writer wrote — in other words, it belongs to the same option series . However, option contracts have no name on them. Sarah buys from the OCC, just as John sold to the OCC, and she just gets a contract giving her the right to buy 100 shares of Microsoft for $30 per share until April, 2007.

Scenario 1 — Exercises of Options are Assigned According to Specific Procedures

In February, the price of Microsoft rises to $35, and Sarah thinks it might go higher in the long run, but since March and April generally are volatile times for most stocks, she decides to exercise her call (sometimes called calling the stock ) to buy Microsoft stock at $30 per share to be able to hold the stock indefinitely. She instructs her broker to exercise her call; her broker forwards the instructions to the OCC, which then assigns the exercise to one of its participating members who provided the call for sale; the participating member, in turn, assigns it to an investor who wrote such a call; in this case, it happened to be John's brother, Sam Call-Writer. John got lucky this time. Sam, unfortunately, either must turn over his appreciated shares of Microsoft, or he'll have to buy them in the open market to provide them. This is the risk that an option writer must take — an option writer never knows when he'll be assigned an exercise when the option is in the money.

Scenario 2 — Closing Out an Option Position by Buying Back the Contract

John Call-Writer decides that Microsoft might climb higher in the coming months, and so decides to close out his short position by buying a call contract with the same terms that he wrote — one that is in the same option series. Sarah, on the other hand, decides to maintain her long position by keeping her call contract until April. This can happen because there are no names on the option contracts. John closes his short position by buying the call back from the OCC at the current market price, which may be higher or lower than what he paid, resulting in either a profit or a loss. Sarah can keep her contract because when she sells or exercises her contract, it will be with the OCC, not with John, and Sarah can be sure that the OCC will fulfill the terms of the contract if she should decide to exercise it later on.

Thus, the OCC allows each investor to act independently of the other .

When the assigned option writer must deliver stock, she can deliver stock already owned, buy it on the market for delivery, or ask her broker to go short on the stock and deliver the borrowed shares. However, finding borrowed shares to short may not always be possible, so this method may not be available.

If the assigned call writer buys the stock in the market for delivery, the writer only needs the cash in his brokerage account to pay for the difference between what the stock cost and the strike price of the call, since the writer will immediately receive cash from the call holder for the strike price. Similarly, if the writer is using margin, then the margin requirements apply only to the difference between the purchase price and the strike price of the option. Full margin requirements, however, apply to shorted stock.

An assigned put writer will need either the cash or the margin to buy the stock at the strike price, even if he intends to sell the stock immediately after the exercise of the put. When the call holder exercises, he can keep the stock or immediately sell it. However, he must have the margin, if he has a margin account, or cash, for a cash account, to pay for the stock, even if he sells it immediately. He can also use the delivered stock to cover a short in the stock. (Note: equity requirements differ because an assigned call writer immediately receives the cash upon delivery of the shares, whereas a put writer or a call holder who purchased the shares may decide to keep the stock.)

Example: Fulfilling a Naked Call Exercise

A call writer receives an exercise notice on 10 call contracts with a strike of $30 per share on XYZ stock on which she is still short. The stock currently trades at $35 per share. She does not own the stock, so, to fulfill her contract, she must buy 1,000 shares of stock in the market for $35,000 then sell it for $30,000, resulting in an immediate loss of $5,000 minus the commissions of the stock purchase and assignment.

Both the exercise and assignment incur brokerage commissions for both holder and assigned writer. Generally, the commission is smaller to sell the option than it is to exercise it. However, there may be no choice if it is the last day of trading before expiration. Although the buying and selling of options is settled in 1 business day after the trade, settlement for an exercise or assignment occurs on the 3 rd business day after the exercise or assignment ( T+3 ), since it involves the purchase of the underlying stock.

Often, a writer will want to cover his short by buying the written option back on the open market. However, once he receives an assignment, then it is too late to cover his short position by closing the position with a purchase. Assignment is usually selected from writers still short at the end of the trading day. A possible assignment can be anticipated if the option is in the money at expiration, the option is trading at a discount, or the underlying stock is about to pay a large dividend.

The OCC automatically exercises any option that is in the money by at least $0.50 ( automatic exercise , Exercise-by-Exception , Ex-by-Ex ), unless notified by the broker not to. A customer may not want to exercise an option that is only slightly in the money if the transaction costs would exceed the net profit from the exercise. In spite of the automatic exercise by the OCC, the option holder should notify his broker by the exercise cut-off time , which may be before the end of the trading day, of an intention to exercise. Exact procedures will depend on the broker.

Any option that is sold on the last trading day before expiration would likely be bought by a market maker. Because a market maker's transaction costs are lower than for retail customers, a market maker may exercise an option even if it is only a few cents in the money. Thus, any option writer who does not want to be assigned should close out his position before expiration day if there is any chance that it will be in the money even by a few pennies.

Early Exercise

Sometimes, an option will be exercised before its expiration day — called early exercise , or premature exercise . Because options have a time value in addition to intrinsic value, most options are not exercised early. However, there is nothing to prevent someone from exercising an option, even if it is not profitable to do so, and sometimes it does occur, which is why anyone who is short an option should expect the possibility of being assigned early.

When an option is trading below parity (below its intrinsic value), then arbitrageurs can take advantage of the discount to profit from the difference, because their transaction costs are very low. An option with a high intrinsic value will have little time value, and so, because of the difference between supply and demand in the market at any given moment, the option could be trading for less than its true worth. An arbitrageur will almost certainly take advantage of the price discrepancy for an instant profit. Anyone who is short an option with a high intrinsic value should expect a good possibility of being assigned an exercise.

Example: Early Exercise by Arbitrageurs Profiting from an Option Discount

XYZ stock is currently at $40 per share. Calls on the stock with a strike of $30 are selling for $9.80. This is a difference of $0.20 per share, enough of a difference for an arbitrageur, whose transaction costs are typically much lower than for a retail customer, to profit immediately by selling short the stock at $40 per share, then covering his short by exercising the call for a net of $0.20 per share minus the arbitrageur's small transaction costs.

Option discounts will only occur when the time value of the option is small, because either it is deep in the money or the option will soon expire.

Option Discounts Arising from an Imminent Dividend Payment on the Underlying Stock

When a large dividend is paid by the underlying stock, its price drops on the ex-dividend date, resulting in a lower value for the calls. The stock price may remain lower after the payment, because the dividend payment lowers the book value of the company. This causes many call holders to either exercise early to collect the dividend, or to sell the call before the drop in stock price. When many call holders sell at the same time, it causes the call to sell at a discount to the underlying, thereby creating opportunities for arbitrageurs to profit from the price difference. However, there is some risk that the transaction will lose money, because the dividend payment and drop in stock price may not equal the premium paid for the call, even if the dividend is more than the time value of the call.

Example: Arbitrage Profit/Loss Scenario for a Dividend-Paying Stock

XYZ stock is currently trading at $40 per share and will pay a dividend of $1 the next day. A call with a $30 strike is selling for $10.20, the $0.20 being the time value of the premium. So an arbitrageur decides to buy the call and exercise it to collect the dividend. Since the dividend is $1, but the time value is only $0.20, this could lead to a profit of $0.80 per share, but on the ex-dividend date, the stock drops to $39. Adding the $1 dividend to the share price yields $40, which is still less than buying the stock for $30 + $10.20 for the call. It might be profitable if the stock does not drop as much on the ex-date or it recovers after the ex-date sufficiently to make it profitable. But this is a risk for the arbitrageur, and this transaction is, thus, known as risk arbitrage , because the profit is not guaranteed.

2019 Statistics for the Fate of Options

Data Source: https://www.optionseducation.org/referencelibrary/faq/options-exercise

All option writers who didn't close out their position earlier by buying an offsetting contract made the maximum profit — the premium — on those contracts that expired. Option writers have lost at least something when the option is exercised, because the option holder wouldn't exercise it unless it was in the money. The more the exercised option was in the money, the greater the loss is for the assigned option writer and the greater the profits for the option holder. A closed out transaction could be at a profit or a loss for both holders and writers of options, but closing out a transaction is usually done either to maximize profits or to minimize losses, based on expected changes in the price of the underlying security until expiration.

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Options and Strike Price

Time value of money, time value decay, the bottom line.

Options and Derivatives
Advanced Concepts

The Importance of Time Value in Options Trading

Most investors and traders new to options markets prefer to buy calls and puts because of their limited risk and unlimited profit potential. Buying puts or calls is typically a way for investors and traders to speculate with only a fraction of their capital. But these straight option buyers miss many of the best features of stock and commodity options, such as the opportunity to turn time-value decay (the reduction in value of an options contract as it reaches its expiration date) into potential profits.

When establishing a position, option sellers collect time-value premiums paid by option buyers. Rather than losing out because of time decay , the option seller can benefit from the passage of time, and time-value decay becomes money in the bank even if the underlying asset is stationary.

Before explaining the importance of time value with respect to option pricing, this article takes a detailed look at the phenomenon of time value and time-value decay. First, we'll look at some basic options concepts that apply to the concept of time value.

Key Takeaways

Options contracts grant rights to options holders to buy or sell the underlying security at or before some point in the future.
The price of an options contract, known as its premium, is essentially linked to the probability that the option will expire in-the-money (with positive value).
As the time to expiration approaches, the chances of a large enough swing in the underlying's price to bring the contract in-the-money diminishes, along with the premium.
This is known as time-decay, whereby all else equal, an option's price will decline over time.

Depending on where the underlying asset is in relation to the option strike price, the option can be in, out, or at the money. At-the-money (ATM) means the strike price of the option is equal to the current price of the underlying stock or commodity. When the price of a commodity or stock is the same as the strike price (also known as the exercise price) it has zero intrinsic value , but it also has the maximum level of time value compared to that of all the other option strike prices for the same month. The table below provides a table of possible positions of the underlying asset in relation to an option's strike price.

This table shows that when a put option is in-the-money (ITM), the underlying price is less than the option strike price. For a call option , in the money means that the underlying price is greater than the option strike price. For example, if we have an S&P 500 call with a strike price of 1,100 (an example we will use to illustrate time value below), and if the underlying stock index at expiration closes at 1,150, the option will have expired 50 points in the money (1,150 - 1,100 = 50).

In the case of a put option at the same strike price of 1100 and the underlying asset at 1050, the option at expiration also would be 50 points in the money (1,100 - 1,050 = 50). For out-of-the-money (OTM) options, the reverse applies. That is, to be out of the money, the put's strike would be less than the underlying price, and the call's strike would be greater than the underlying price. Finally, both put and call options would be at the money when the underlying asset expires at the strike price. While we are referring here to the position of the option at expiration, the same rules apply at any time before the options expire.

With these basic relationships in mind, we take a closer look at time value and the rate of time-value decay (represented by theta , from the Greek alphabet). If we ignore volatility , for now, the time-value component of an option, also known as extrinsic value, is a function of two variables: (1) time remaining until expiration and (2) the closeness of the option strike price to the money. All other things remaining the same (or no changes in the underlying asset and volatility levels), the longer the time to expiration, the more value the option will have in the form of time value.

But this level is also affected by how close to the money the option is. For example, two call options with the same calendar month expiration (both having the same time remaining in the contract life) but different strike prices will have different levels of extrinsic value (time value). This is because one will be closer to the money than the other.

The table below illustrates this concept and indicates when time value would be higher or lower and whether there will be any intrinsic value (which arises when the option gets in the money) in the price of the option. As the table indicates, deep in-the-money options and deep out-of-the-money options have little time value. Intrinsic value increases the more in-the-money the option becomes. And at-the-money options have the maximum level of time value but no intrinsic value. Time value is at its highest level when an option is at the money because the potential for intrinsic value to begin to rise is greatest at this point.

In the figure below, we simulate time-value decay using three at-the-money S&P 500 call options, all with the same strikes but different contract expiration dates. This should make the above concepts more tangible. Through this presentation, we are making the assumption (for simplification) that implied volatility levels remain unchanged and the underlying asset is stationary. This helps us to isolate the behavior of time value. The importance of time value and time-value decay should thus become much clearer.

Taking our series of S&P 500 call options, all with an at-the-money strike price of 1,100, we can simulate how time value influences an option's price. Assume the date is Feb. 8. If we compare the prices of each option at a certain moment in time, each with different expiration dates (February, March, and April), the phenomenon of time-value decay becomes evident. We can witness how the passage of time changes the value of the options.

The figure below illustrates the premium for these at-the-money S&P 500 call options with the same strikes. With the underlying asset stationary, the February call option has five days remaining until expiry, the March call option has 33 days remaining, and the April call option has 68 days remaining.

As the figure below shows, the highest premium is at the 68-day interval (remember prices are from Feb. 8), declining from there as we move to the options that are closer to expiration (33 days and five days). Again, we are simply taking different prices at one point in time for an at-the-option strike (1100), and comparing them. The fewer days remaining translates into less time value. As you can see, the option premium declines from $38.90 to $25.70 when we move from the strike 68 days out to the strike that is only 33 days out.

The next level of the premium, a decline of 14.7 points to $11, reflects just five days remaining before expiration for that particular option. During the last five days of that option, if it remains out of the money (the S&P 500 stock index below 1,100 at expiration), the option value will fall to zero, and this will take place in just five days. Each point is worth $250 on an S&P 500 option.

One important dynamic of time-value decay is that the rate is not constant. As expiration nears, the rate of time-value decay (theta) increases (not shown here). This means that the amount of time premium disappearing from the option's price per day is greater with each passing day.

The concept is looked at in another way in the figure below: The number of days required for a $1 (1 point) decline in premium on the option will decrease as expiry nears.

This shows that at 68 days remaining until expiration, a $1 decline in premium takes 1.75 days. But at just 33 days remaining until expiration, the time required for a $1 loss in premium has fallen to 1.28 days. In the last month of the life of an option, theta increases sharply, and the days required for a one-point decline in premium falls rapidly.

At five days remaining until expiration, the option is losing one point in just less than half a day (0.45 days). If we look again at the Time-Value Decay figure, at five days remaining until expiration, this at-the-money S&P 500 call option has 11 points in premium. This means that the premium will decline by approximately 2.2 points per day. Of course, the rate increases even more in the final day of trading, which we do not show here.

How Is an Option's Time Decay Measured?

Options traders use the Greek value Theta (Θ) to measure time decay, and interpret it as the dollar change in an option's premium given one additional day to expiration, all else equal. Therefore, an option with a premium of $2.30 and a theta of $0.05 will be worth $2.25 the next day, assuming nothing else changes.

Which Options Have the Greatest Time Value?

At-the-money options have the greatest time value (and are also most sensitive to time decay, as measured by theta). Moreover, options approaching expiration see their time decay accelerate the fastest relative to those with longer expirations remaining.

Why Is Time Value of Options Also Called Extrinsic Value?

An option's premium is composed of two parts: intrinsic and extrinsic value. Intrinsic value is the amount of money the option contains if it were exercised immediately. For instance, a 30-strike call allows you to buy shares at $30, and if the stock is trading at $35, there has to be $5 of intrinsic value in that call. Extrinsic value is anything above the intrinsic value. So, if you instead owned the 40-strike call when the stock is trading at $35, it wouldn't be worth anything to exercise at the moment. But, there would still be a premium, or the extrinsic value, which is based on the chances that this option will pan out before expiration. This is based on the time value of the option, since the more time there remains, the more chances the stock will rise above $40.

While there are other pricing dimensions (such as delta, gamma, and implied volatility), a look at time-value decay is helpful to understand how options are priced .

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Trading Options: Understanding 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 ...
Options Exercise, Assignment, and More: A Beginner's Guide
Learn about options exercise and options assignment before taking a position, not afterward. This guide can help you navigate the dynamics of options expiration. 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 ...
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Options assignment is a process in options trading that involves fulfilling the ... it is impossible always to time the market perfectly, and assignment risk is the risk option sellers must assume
Options Assignment Explained (2024): Complete Trader's Guide
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.
How to exercise, roll, and assign options
Managing an options trade is quite different from that of a stock trade. Essentially, there are 4 things you can do if you own options: hold them, exercise them, roll the contract, or let them expire. If you sell options, you can also be assigned. If you are an active investor trading options with some percentage of your overall investment ...
What is Option Assignment? How and Why Assignment Happens
Option buyers have the right to exercise an option at any time. Option sellers are obligated to accept assignment if the buyer exercises the option. Option assignment is random and cannot be refused. Options can be assigned until 30 minutes after the market closes (4:30 pm EST). An option must be closed before the end of the market day to avoid ...
Understanding options assignment risk
Understanding assignment risk in Level 3 and 4 options strategies. 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 ...
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The assignment process is done at random by the Options Clearing Corporation (OCC). A trader will become more acquainted with the operations of the OCC as he or she learns to trade options. When a ...
The Risks of Options 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 ...
Complete Options Expiration & Assignment Guide
Learn about the options expiration and assignment process with Option Alpha's guided video lesson. Get Option Alpha 100% FREE by connecting your TradeStation or Tradier Brokerage account! ... An American-style options may be exercised at any time before its expiration, and at anytime up to an including the third Friday of the expiration month. ...
Options Assignment
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.
What Is Option Assignment & How Does It Work?
The option premium you collect is $10. After three weeks, the stock has jumped to $105, and the short calls are worth $6. You are alerted that you now face a call option assignment. While a small percentage of options contracts are exercised, you are among the few who are chosen to be assigned.
Option Assignment Process: Everything You Need to Know
Situation 1: Your option is In The Money (ITM) When an option is ITM, an option holder would stand to profit if they exercised the option. The deeper the option is ITM, the greater the profit for the option holder and therefore the higher risk they may exercise the option and you will be assigned. Situation 2: The option has an upcoming dividend.
What Is an Option Assignment?
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. ... you're promising to buy a stock at a set price any time between when the transaction happens and the ...
Ready for Options Trading? Make Sure You Understand Assignment First
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 ...
Dividends and Options Assignment Risk
If a covered call option you have sold is in the money and the dividend exceeds the remaining time value of the option, there is a good chance an owner of those calls will exercise his options early. ... Ways to avoid the risk of early assignment. If you are selling options (covered or uncovered), there is always the risk of being assigned if ...
Options Exercise, Assignment, and More: A Beginner's Guide
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 ...
Options Expiration: Definitions, a Checklist, & More
American-style options can be exercised any time before the options expiration date, whereas European-style options can only be exercised at expiration.Standard U.S. equity options (options on single-name stocks) are American-style. Most options on stock indexes, such as the Nasdaq-100 ® (NDX), S&P 500 ® (SPX), and Russell 2000 ® (RUT), are European-style.
Options Assignment & How To Avoid It
This would start the options assignment process. Exercise the option early: The last possibility would be to exercise the option before its expiration date. This, however, can only be done if the option is an American-style option. This would, once again, lead to an option assignment. So as an option seller, you only have to worry about the ...
Options on Futures: The Exercise and Assignment Process
Brochure describing exercise and assignment process for options trades on CME Group exchanges: Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), Commodity Exchange (COMEX), and New York Mercantile Exchange (NYMEX). Includes an overview of the contrary options exercise process.
Options Settlement Guide
Assignment risk. Equity options sellers are at risk of assignment at any time. However, it is usually in the option buyer's best interest not to exercise an options contract early, but there are circumstances that increase the risk of assignment. The majority of options exercises, and therefore options assignments, occur near expiration.
The Mechanics of Option Trading, Exercise, and Assignment
The settlement time for option trades is 1 business day (T+1). ... and for the exercise and assignment of option contracts. Prices are usually quoted with a base price + cost per contract, usually ranging from $5 to $15 minimum charge for up to 10 contracts, with a lower per contract charge, typically $0.50 to $1.50 per contract, for more than ...
The Importance of Time Value in Options Trading
Options traders use the Greek value Theta (Θ) to measure time decay, and interpret it as the dollar change in an option's premium given one additional day to expiration, all else equal. Therefore ...

Options Assignment: Navigating the Rights and Obligations

By Tyler Corvin

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