Great, you have saved this article to you My Learn Profile page.

Clicking a link will open a new window.

4 things you may not know about 529 plans

Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some juristictions to falsely identify yourself in an email. All information you provide will be used solely for the purpose of sending the email on your behalf. The subject line of the email you send will be “Fidelity.com”.

Thanks for you sent email.

Exercising your options

exercise or assignment

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

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

Holding your options

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

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

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

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

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

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

Employee stock plan options

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

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

Rolling your options

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

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

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

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

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

Let the options expire

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

Research options

Get new options ideas and up-to-the-minute data on options.

More to explore

5 steps to develop an options trading plan, discover more options strategies, subscribe to fidelity viewpoints ®, looking for more ideas and insights, thanks for subscribing.

  • Tell us the topics you want to learn more about
  • View content you've saved for later
  • Subscribe to our newsletters

We're on our way, but not quite there yet

Oh, hello again, thanks for subscribing to looking for more ideas and insights you might like these too:, looking for more ideas and insights you might like these too:, fidelity viewpoints ® timely news and insights from our pros on markets, investing, and personal finance. (debug tcm:2 ... decode crypto clarity on crypto every month. build your knowledge with education for all levels. fidelity smart money ℠ what the news means for your money, plus tips to help you spend, save, and invest. active investor our most advanced investment insights, strategies, and tools. insights from fidelity wealth management ℠ timely news, events, and wealth strategies from top fidelity thought leaders. women talk money real talk and helpful tips about money, investing, and careers. educational webinars and events free financial education from fidelity and other leading industry professionals. fidelity viewpoints ® timely news and insights from our pros on markets, investing, and personal finance. (debug tcm:2 ... decode crypto clarity on crypto every month. build your knowledge with education for all levels. fidelity smart money ℠ what the news means for your money, plus tips to help you spend, save, and invest. active investor our most advanced investment insights, strategies, and tools. insights from fidelity wealth management ℠ timely news, events, and wealth strategies from top fidelity thought leaders. women talk money real talk and helpful tips about money, investing, and careers. educational webinars and events free financial education from fidelity and other leading industry professionals. done add subscriptions no, thanks. options trading entails significant risk and is not appropriate for all investors. certain complex options strategies carry additional risk. before trading options, please read characteristics and risks of standardized options . supporting documentation for any claims, if applicable, will be furnished upon request. there are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, and collars, as compared with a single option trade. greeks are mathematical calculations used to determine the effect of various factors on options. 1. this is a complex decision with potentially significant tax consequences and requires careful analysis and, ideally, the involvement of a tax and/or financial planning professional. past performance is no guarantee of future results. fidelity brokerage services llc, member nyse, sipc , 900 salem street, smithfield, ri 02917 939787.2.0 mutual funds etfs fixed income bonds cds options active trader pro investor centers stocks online trading annuities life insurance & long term care small business retirement plans 529 plans iras retirement products retirement planning charitable giving fidsafe , (opens in a new window) finra's brokercheck , (opens in a new window) health savings account stay connected.

exercise or assignment

  • News Releases
  • About Fidelity
  • International
  • Terms of Use
  • Accessibility
  • Contact Us , (Opens in a new window)
  • Disclosures , (Opens in a new window)

Expiration, exercise, and assignment

Unlike a stock, each option contract has a set expiration date. The expiration date significantly impacts the value of the option contract because it limits the time you can buy, sell, or exercise the option contract. Once an option contract expires, it will stop trading and either be exercised or expire worthless.

There are a few important things to keep in mind as the expiration date of your option contract nears:

  • We’ll attempt to exercise any option you own that is $0.01 or more in the money, as long as your brokerage account has the required buying power (in the case of a call option) or the necessary underlying shares to sell (in the case of a put option). Keep in mind that managing your options positions, including taking proactive steps to mitigate risk, is ultimately your responsibility.
  • If you don’t have enough buying power or underlying shares to exercise your option, we may attempt to sell the contract in the market for you within the last thirty minutes before the market closes on the options' expiration date.
  • Robinhood’s risk checks are designed to close positions which accounts cannot support and take into consideration the value of a position, the implied risk, and the customer’s current balance, among other things.

If your option is in the money at the close, Robinhood will attempt to exercise it for you at expiration unless:

  • You don’t have sufficient buying power.
  • The exercise would result in a short stock position.
  • You have asked Robinhood to submit a Do-Not-Exercise request on your behalf.
  • The cut-off time for submitting a Do-Not-Exercise request is 5 PM ET.

If you have a long call about to expire:

  • If the contract is in the money (or at risk of being in the money), we’ll review your account to see if you have enough buying power to purchase the underlying shares.
  • If you don’t have enough buying power to purchase the underlying shares, we may attempt to sell the option. For example, if you have 10 contracts, but only enough buying power to purchase 500 shares, we may attempt to sell 5 contracts and allow 5 contracts to be exercised for a total of 500 shares. To avoid this, you can close the position or roll it to a later date prior to the last thirty minutes of trading (before 3:30PM ET on normal trading days). Keep in mind that options rolling involves simultaneously closing a position (realizing any gains or losses) and opening a new one. Also, options rolling is only available in margin accounts .

If you have a long put about to expire:

  • If the contract is in the money (or at risk of being in the money), we’ll review your account to see if you have enough of the underlying shares to sell.
  • If you don’t have enough of the underlying shares, we may attempt to sell the option. For example, if you have 10 contracts and own 500 shares, we will attempt to sell 5 contracts and allow the remaining 5 contracts to be exercised, which would result in 500 shares sold from your brokerage account. To avoid this, you can close the position or roll it to a later date prior to the last thirty minutes of trading (before 3:30 PM ET on normal trading days). Keep in mind that options rolling involves simultaneously closing a position (realizing any gains or losses) and opening a new one. Also, options rolling is only available in margin accounts .

If you have a spread about to expire:

  • If both legs are in the money (and neither leg is at risk of being out of the money at expiration). The short leg may be assigned, and the long leg may be exercised to offset the assignment.
  • If the spread is partially in the money or close to being partially in the money (i.e. only one leg is in the money or at risk of being in the money), we may attempt to close the entire spread (including the leg that is out of the money). To avoid this, you can close the position prior to the last thirty minutes of trading (before 3:30PM ET on normal trading days).
  • If both legs are out of the money (and they aren’t at risk of being in the money at expiration), we typically won’t take action and both options should expire worthless.

Once your contract expires, we’ll remove it from your home screen. You can view your expired contracts in your account history.

After-hours price movements can change the in the money or out of the money status of an options contract.

If for any reason we can't sell your contract, and you don’t have the necessary buying power or shares to exercise it, we may attempt to submit a Do Not Exercise request to the Options Clearing Corporation (OCC), and your contract should expire worthless.

To determine if an option position is “at risk of being in the money,” Robinhood will calculate an estimated upper and lower bound for the underlying security’s close price on the expiration date. If your option’s strike price falls within these parameters, we may place an order to close your position.

If your option is in the money, Robinhood will typically exercise it for you at expiration automatically.

You can also exercise your options contract early in the app:

  • Navigate to the options position detail screen
  • Select Exercise

You’ll then be guided through steps to exercise your contract.

Before expiration day, an early exercise request will be submitted immediately if it’s placed during trading between 9 AM ET and 4 PM ET. Please contact us before 5 PM ET if you’d like to cancel the exercise request.

Early exercise requests submitted after 4 PM ET will be queued for the next trading day. You can cancel the pending exercise request until 11:59 PM ET.

On expiration day, you won’t be able to submit an early exercise request in the app or on the web after 4 PM ET. Please contact us to request an exercise request after 4 PM ET. We will attempt to accommodate exercise requests until 5 PM ET on a best-efforts basis.

Once you exercise an option, you’ll see a card displayed on your home screen that confirms your option was exercised and that the associated shares are pending. You’ll also receive an email and push notification before the next trading day confirming that your option was exercised or assigned (after we receive confirmation from the OCC).

If your option is out-of-the-money, Robinhood will take no action and the contract typically will expire. If you’d like to submit a Do Not Exercise request, you will need to send an email to our Options Support Team .

Instructions for a Do Not Exercise need to be received by Robinhood before 5:00PM ET on the expiration date.

When you are assigned, you have the obligation to fulfill the terms of the contract. When you sell-to-open an options contract, you can be assigned at any point prior to expiration (regardless of the underlying share price).

Depending on the collateral held for your short contract under the following circumstances, there are a few different things that could happen.

The shares you have as collateral should be sold to settle the assignment. No additional action should be necessary.

The buying power you have as collateral will be used to purchase shares and settle the assignment. No additional action should be necessary.

You have the obligation to sell shares of the underlying security at the strike price. In this case, the long leg (the call option you bought) should provide the collateral needed to cover the short leg.

You can exercise the long leg of your spread, purchasing the shares you need to settle the assignment.

Example: You enter a XYZ call spread, so you buy one call contract of XYZ (the long leg) and sell one call contract of XYZ (the short leg).

You provide the shares necessary to settle the contract when you’re assigned, so your brokerage account is now short 100 shares of XYZ. To cover the short position in your account, you could exercise the XYZ call contract you bought to receive 100 shares of XYZ. Alternatively, you could also buy back the 100 short shares from the market followed by selling the long call in the open market to capture any time/extrinsic value remaining in the option.

You could sell the long leg of your spread, then separately purchase the shares you need to cover the assignment.

When you’re assigned, you sell the shares necessary to settle the assignment and your brokerage account is now short 100 shares of XYZ. Because your long option is out of the money, exercising it would result in purchasing the underlying security at a price higher than what is currently offered in the marketplace. Instead, you could sell the call contract you own, and then separately buy 100 shares of XYZ to settle the short call assignment.

If you’re assigned on the short leg (the put contract you sold) of your spread, you have the obligation to buy shares of the underlying security at the strike price.

In this case, the long leg (the put contract you bought) should provide the collateral needed to cover the short leg. When you exercise the long leg of your spread, you can sell shares aiming to recover the funds you used to settle the short put assignment.

Example: You enter a XYZ put spread, so you buy one put contract of XYZ (the long leg) and sell one put contract of XYZ (the short leg).

When you’re assigned, you have to buy 100 shares of XYZ at the strike price of the assigned put. To help offset the assignment, you can exercise the long XYZ put contract you own to sell the 100 shares of XYZ you just purchased from the short assignment. Alternatively, you could also sell both the shares and the long put in the open market to capture any time/extrinsic value remaining in the long put.

You can sell the long leg of your spread, then separately sell the shares you need to cover the assignment.

Example: You enter an XYZ put spread, so you buy one put contract of XYZ (the long leg) and sell one put contract of XYZ (the short leg).

When your short leg is assigned, you buy 100 shares of XYZ, which may put your brokerage account in a deficit of funds. You can’t exercise the long leg to cover the deficit in your account since it’s out of the money. Instead, you can sell the put contract you own, then separately sell the 100 shares of XYZ you just received from the assignment to help cover the deficit in your account. Alternatively, you can continue to hold the long stock position if your account can support the purchase of the 100 shares.

Check out Advanced Options Strategies (Level 3) to learn more about calls, puts, and multi-leg options strategies.

Unassigned anticipated assignment

On rare occasions, an in the money short option will not get assigned. This happens when the counterparty files a Do Not Exercise request for their in the money option, or a post-market movement shifts the option from in the money to out of the money (and the contract holder decides not to exercise). In this scenario, you will likely be long or short the stock the following trading day, potentially resulting in an account deficit or margin call.

All resulting short positions must be covered the following trading day.

The scenario listed above could result in a gain or loss that’s greater than theoretical max gain/loss on the position.

Early assignment

If you’re trading a multi-leg options strategy and you are assigned on your short position before expiration, there are a few things to keep in mind.

Early assignment may result in decreased buying power. This is because the positions you hold are used to calculate your buying power, and at the time you’re assigned you may not have the shares (for call spreads) or buying power (for put spreads) needed to cover the deficit in your account. If you have an account deficit, you can’t open new positions until the deficit is resolved.

Early assignment may also result in an account deficit if it causes you to use more buying power than you have available. When you have an account deficit, there are a few potential actions that you can take, including exercising your long contract or buying/selling shares. If you have an account deficit and choose to exercise your long contract to increase your buying power, you will not be able to open new positions while your exercise is pending. But you should be able to open new positions once your exercise has been processed if exercising your long contract is sufficient to cover your account deficit.

Early assignment may also result in margin call (assuming you have margin investing enabled on your brokerage account) if it causes your account value to fall below your margin maintenance requirement. When you have a margin call, there are a few potential actions that you can take: exercising your long contract, buying/selling shares by placing orders, or depositing enough funds to cover the margin call. If you have a margin call and choose to exercise your long contract to decrease your margin deficiency, your margin call may persist while your exercise is pending or, further, if the exercise was not sufficient enough to cover your margin deficit. If exercising your long contract is sufficient to cover your margin deficiency, any margin calls should be satisfied once your exercise is processed.

Keep in mind that we can’t process an early assignment before the end of the trading day and, so we can’t exercise the long leg until the next trading day (at the earliest). That’s because the Options Clearing Corporation (OCC) doesn’t notify us of your assignment until after the market closes (when they process assignments). While funds and shares that result from exercises are made available immediately during market hours, positions exercised after market hours are queued and credited to your account the next trading day.

In-the-money and out-of-the-money

These labels refer to the position of the underlying security’s price relative to the strike price of the option. They’re also sometimes referred to as the moneyness of an option.

  • A call option is in the money if the underlying security's price is above the option’s strike price.
  • A call option is out of the money if the underlying security’s price is below the option’s strike price.
  • A put option is in the money if the underlying security’s price is below the option’s strike price.
  • A put option is out of the money if the underlying security’s price is above the option’s strike price.

A $20 call option for XYZ stock would be in the money if XYZ stock was trading at $20.01 or greater. A $20 Put option for XYZ stock would be in the money if XYZ stock was trading at $19.99 or below.

Keep in mind that an option contract being in the money doesn’t necessarily mean that its owner will make a profit if they were to exercise it.

Pending shares

A few things can happen if your option is exercised early, depending on the time of day.

If the early exercise occurs between 9 AM ET and 4 PM ET, the associated shares should appear in your account immediately; you shouldn’t see any pending exercise in your account.

If the early exercise happens after 4 PM ET, it will be queued for the next trading day, and the associated shares will remain pending until the exercise has cleared.

Once your contract has been exercised or assigned, we’ll hold the associated shares or cash collateral until we receive confirmation from the OCC that all aspects of the exercise or assignment have cleared. This process typically takes 1 business day. Once completed, the pending state of the exercise or assignment will be removed and your account will be updated accordingly.

Finding your trade details

  • Select the Account icon in the bottom-right corner of your screen
  • Select History
  • Choose the option you’re looking for (e.g. XYZ $1,200 Call 10/21 Exercise)
  • Select the Menu icon in the upper-right corner of your screen
  • Select Statements and History
  • Select Account in the upper-right corner of your screen
  • Scroll to find the option you’re looking for (e.g. XYZ $1,200 call 10/21 Exercise)

Options dividend risk

Dividend risk is the risk that you’ll get assigned on any short call position (either as part of a covered call or spread) the trading day before the underlying security’s ex-dividend date. If this happens, you’ll open the ex-date with a short stock position and actually be responsible for paying that dividend yourself. You can potentially avoid this by closing any position that includes a short call option at any time before the end of the regular-hours trading session the day before the ex-date.

Robinhood may take action in your brokerage account to close any positions that have dividend risk the day before an ex-dividend date. Generally, we’ll only take action if your account wouldn’t be able to cover the dividend that would be owed after an assignment. This is done on a best-efforts basis.

XYZ will pay out the following dividend in the future:

  • Ex-Date: October 1, 2021
  • Record Date: October 3, 2021
  • Pay Date: October 31, 2021
  • Amount: $1.00

If you’re short, or you’ve sold 1 option call contract for XYZ expiring on or after October 1, there is a risk that you could be assigned.

For example, if you get assigned on September 30, you would have a short position of the 100 shares that were exercised by the counterparty (a person who bought and exercised the call option) when the market opens on October 1. In this case, you’ll have to deliver the underlying shares and pay the counterparty the dividend that is associated with these shares.

In this example, you’ll owe $1.00 x 100 shares = $100. We’ll automatically deduct the dividend amount from your account, even if it causes you to have a negative balance.

You can avoid this dividend risk by closing your option before the market closes on any day before the ex-dividend date.

Note: The day before the ex-dividend, we’ll attempt to prevent customers from selling to open new short call options that are likely to be assigned that same night due to the underlying symbol ex-dividend date being the next trading day. This is only temporary, and you can open new short call positions on or after the ex-dividend date.

Disclosures

Any hypothetical examples are provided for illustrative purposes only. Actual results will vary.

Content is provided for educational purposes only, doesn't constitute tax or investment advice, and isn't a recommendation for any security or trading strategy. All investments involve risk, including the possible loss of capital. Past performance doesn't guarantee future results.

Options trading entails significant risk and isn't appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. If multiple options positions or strategies are established in the same underlying symbol, Robinhood Financial may deem it necessary to pair or re-pair the separately established options positions or strategies together as part of its risk management process.

Robinhood Financial doesn't guarantee favorable investment outcomes. The past performance of a security or financial product doesn't guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy.

Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. Before using margin, customers must determine whether this type of trading strategy is right for them given their specific investment objectives, experience, risk tolerance, and financial situation.

For more information, review Robinhood Financial’s Margin Disclosure Statement , Margin Agreement and FINRA Investor Information . These disclosures contain information on Robinhood Financial’s lending policies, interest charges, and the risks associated with margin accounts.

Securities trading is offered through Robinhood Financial LLC (member SIPC ), which is a registered broker-dealer. Robinhood Securities, LLC (member SIPC ) is a registered broker-dealer and provides clearing services. Both are subsidiaries of Robinhood Markets, Inc. (‘Robinhood’).

Markets Home

Market data home.

Real-time market data

Market Data on Google Analytics Hub

CME DATAMINE:

THE SOURCE FOR HISTORICAL DATA

Services Home

Clearing Advisories

Uncleared margin rules

Insights Home

Subscribe to Research

Get our latest economic research delivered to your email inbox.

Explore Global Trends

Education Home

Now available: Excell with Options Report

New to Futures?

Exercise and Assignment

Options buyers  exercise  their options.

Options sellers are  assigned  when an option is exercised.

Exercising your right

A call option is the right to buy the underlying future at the strike price. The process for activating that “right”, is called “exercising the right” or simply to “exercise” the option. For a call option, that activity is also referred to as “calling the underlying” away from the option seller.

Options buyers (either put or call buyers) are the only ones that control whether an option can be exercised.  Option sellers have the obligation if assigned and thus have no control over the exercise procedure.

A put option gives the owner of the option, the right to “put” the underlying future, to the seller of the option. Imagine if a store offers a “30 day no questions asked return policy”, that is like a “put”. You can “put” the item back on the store’s shelf and get a refund. If you return the item to the store, you have “exercised your right” to sell the item back to the store.

Option buyers are the only options traders who can “exercise” the right. Call owners, those who are “long the call”, can exercise their right to buy the underlying at the strike price. And put owners, those who are “long the put”, can exercise their right to sell the underlying at the strike price.

Being assigned

Sellers of call options are  obligated  to sell you that future, at a specific price. They were paid a premium to take on the risk of having to sell you something at a lower price than the current market.

Similarly, the writers of put options are  obligated  to buy that future at the specific price, that is higher than the current market price.

When an option owner exercises the right embedded in the contract, someone has to be assigned the duty of fulfilling the obligation, and it may not be the original person who sold the option.

The process of assigning options is performed by the central clearing house. CME Clearing using an algorithm to randomize the assignment to the options sellers.

Options owners exercise their contracts when markets move in their favor. Sellers of options accept premium and could be assigned when markets benefit the buyers.

Long call option upon exercise results in long futures

Short call option upon assignment results in short futures position (futures called away)

Long put option upon exercise results in short futures position

Short put option upon assignment results in long futures position (long futures put into their account)

Test Your Knowledge

Accredited course.

Did you know that CME Institute classes can fulfill CFA and GARP continuing education requirements? Every CME Institute course can be self-reported in your CFA online  CE tracker  and select classes can be used for GARP credits. See which of our classes qualify for GARP credits  here .

What did you think of this course?

To help us improve our education materials, please provide your feedback .

Extend your learning

Practice tool, put your knowledge into practice with the trading simulator, trading challenge, get hands on experience with the latest trading challenge.

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 .

© 2024 CME Group Inc. All rights reserved.

Disclaimer   |   Privacy Notice   |   Cookie Notice   |   Terms of Use   |   Data Terms of Use   |   Modern Slavery Act Transparency Statement   |  Report a Security Concern

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

... More ways to contact Schwab

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

The Risks of Options Assignment

exercise or assignment

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

Understanding the basics of assignment

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

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

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

When a trader might get assigned

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

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

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

Reducing the risk associated with assignment

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

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

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

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

Assess the risk

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

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

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

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

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

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

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

Just getting started with options?

More from charles schwab.

exercise or assignment

Today's Options Market Update

exercise or assignment

Weekly Trader's Outlook

exercise or assignment

Intro to Put Ratio Options Spreads

Related topics.

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

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

Spread trading must be done in a margin account.

Multiple leg options strategies will involve multiple commissions.

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

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

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

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

exercise or assignment

888.637.3343

exercise or assignment

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

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

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

exercise or assignment

Exercising Options

Submitting exercise or do-not-exercise instructions:.

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

exercise or assignment

What's the Net?

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

LinkedIn popup

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

I'd Like to

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

Discover Merrill

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

Representatives are available 24/7

[email protected]

Unlimited $0 Trades

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

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

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

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

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

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

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

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

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

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

© 2024 Bank of America Corporation. All rights reserved.

5676695-05112024

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 plus 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 plus $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.

Mike Martin

Option exercise and assignment explained w/ visuals.

  • Categories: Options Trading

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

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

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

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

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

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

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

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

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

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

Options Trading for Beginners(2)(1)

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

Exercise and Assignment Examples

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

exercise assign table 1

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

Automatic Exercise at Expiration

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

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

What if You Don't Have Enough Available Capital?

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

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

Why Options are Rarely Exercised

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

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

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

exercise table

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

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

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

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

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

7% Of Options Are Exercised

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

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

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

Who Gets Assigned When an Option is Exercised?

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

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

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

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

Visualizing Assignment and Exercise

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

Exercise assign process

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

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

Assessing Early Option Assignment Risk

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

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

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

Assessing Assignment Risk

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

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

Next Lesson

Option Trading for Beginners

Options Trading for Beginners

intrinsic vs extrinsic value

Intrinsic and Extrinsic Value in Options Trading Explained

Greek Pillars

Option Greeks Explained: Delta, Gamma, Theta & Vega

Projectfinance options tutorials.

➥ Bullish Strategies

➥ Bearish Strategies

➥ Neutral Strategies

➥ Vertical Spreads Guide

☆ Options Trading for Beginners ☆

➥ Basics of Calls and Puts

➥ What is a Strike Price?

➥ Option Expiration

➥ Intrinsic and Extrinsic Value

➥ Exercise and Assignment

➥ The Bid-Ask Spread

➥ Volume and Open Interest

➥ Option Chain Explained

➥ Option Greeks 101

➥ Delta Explained

➥ Gamma Explained

➥ Theta Explained

➥ Vega Explained

➥ Implied Volatility Basics

➥ What is the VIX Index?

➥ The Expected Move

➥ Trading VIX Options

➥ Trading VIX Futures

➥ The VIX Term Structure

➥ IV Rank vs. IV Percentile

➥ Option ​Order Types 101

➥ Stop-Loss Orders On Options Explained

➥ Stop Limit Order in Options: Examples W/ Visuals

➥ Limit Order in Option Trading Explained w/ Visuals

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

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

Additional Resources

Exercise and Assignment – CME Group

Learn About Exercise and Assignment – CME Group

Chris Butler portrait

About the Author

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

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

Our Authors

Share this post

Leave a reply cancel reply.

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

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

exercise or assignment

Quick Links

Other links.

  • Terms & Conditions
  • Privacy Policy

© 2024 projectfinance, All Rights Reserved.

Disclaimer: Neither projectfinance or any of its officers, directors, employees, other personnel, representatives, agents or independent contractors is, in such capacities, a licensed financial adviser, registered investment adviser, registered broker-dealer or FINRA|SIPC|NFA-member firm. projectfinance does not provide investment or financial advice or make investment recommendations. projectfinance is not in the business of transacting trades, nor does projectfinance agree to direct your brokerage accounts or give trading advice tailored to your particular situation. Nothing contained in our content constitutes a solicitation, recommendation, promotion, or endorsement of any particular security, other investment product, transaction or investment. Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Past Performance is not necessarily indicative of future results.

tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade.

Exercising Options

The holder of an american-style option can exercise his right to buy (in the case of a call) or to sell (in the case of a put) the underlying shares of stock. .

They first must direct their brokerage firm to submit an exercise notice to OCC. For an option holder to ensure that they exercise the option on that particular day, the holder must notify his brokerage firm before that day’s cut-off time for accepting exercise instructions.

The brokerage firm notifies OCC that an option holder wishes to exercise an option. OCC then randomly assigns the exercise notice to a clearing member. For an investor, this is generally his brokerage firm chosen at random from a total pool of such firms. The firm must then assign one of its customers who has written (and not covered) that particular option.

Assignment to a customer is either random or on a first-in-first-out basis. This depends on the firm’s method. Ask your brokerage firm which method it uses for assignments.

The holder of an American-style option contract can exercise the option at any time before expiration. Therefore, an option writer may be assigned an exercise notice on a short option position at any time before expiration. If an option writer is short an option that expires in-the-money, they should expect assignment on that contract, though assignment is not guaranteed as some long in-the-money option holders may elect not to exercise in-the-money options. In fact, some option writers are assigned on short contracts when they expire exactly at-the-money or even out-of-the money. This occurrence is usually not predictable.

To avoid assignment on a written option contract on a given day, the position must be closed out before that day's market close. Once assignment is received, an investor has no alternative but to fulfill assignment obligations per the terms of the contract.

There is generally no exercise or assignment activity on options that expire out-of-the-money. Owners usually let them expire with no value. Although this is not always the case as post-market underlying moves may lead to out-of-the-money options being exercised and in-the-money options not being exercised.

READ MORE ON ASSIGNMENT (PDF)

What's the Net?

When an investor exercises a call option, the net price paid for the underlying stock on a per share basis is the sum of the call's strike price plus the premium paid for the call. Likewise, when an investor who has written a call contract is assigned an exercise notice on that call, the net price received on per share basis is the sum of the call's strike price plus the premium received from the call's initial sale.

When an investor exercises a put option, the net price received for the underlying stock on per share basis is the sum of the put's strike price less the premium paid for the put. Likewise, when an investor who has written a put contract is assigned an exercise notice on that put, the net price paid for the underlying stock on per share basis is the sum of the put's strike price less the premium received from the put's initial sale.

Early Exercise/Assignment

For call contracts, owners might exercise early to own the underlying stock to receive a dividend. Check with your brokerage firm on the advisability of early call exercise.

It is extremely important to realize that assignment of exercise notices can occur early, days or weeks in advance of expiration day. Investors should expect this as expiration nears with a call considerably in-the-money and a sizeable dividend payment approaching. Call writers should be aware of dividend dates and the possibility of early assignment.

When puts become deep in-the-money, most professional option traders exercise before expiration. Therefore, investors with short positions in deep in-the-money puts should be prepared for the possibility of early assignment on these contracts.

Volatility is the tendency of the underlying security's market price to fluctuate up or down. It reflects a price change's magnitude. It does not imply a bias toward price movement in one direction or the other. It is a major factor in determining an option's premium.

The higher the volatility of the underlying stock, the higher the premium. This is because there is a greater possibility that the option will move in-the-money. Generally, as the volatility of an underlying stock increases, the premiums of both calls and puts overlying that stock increase and vice versa.

  • Share full article

Advertisement

Supported by

Guest Essay

The Most Important Writing Exercise I’ve Ever Assigned

An illustration of several houses. One person walks away from a house with a second person isolated in a window.

By Rachel Kadish

Ms. Kadish is the author of the novel “The Weight of Ink.”

“Write down a phrase you find abhorrent — something you yourself would never say.”

My students looked startled, but they cooperated. They knew I wouldn’t collect this exercise; what they wrote would be private unless they chose to share it. All that was required of them was participation.

In silence they jotted down a few words. So far, so good. We hadn’t yet reached the hard request: Spend 10 minutes writing a monologue in the first person that’s spoken by a fictitious character who makes the upsetting statement. This portion typically elicits nervous glances. When that happens, I remind students that their statement doesn’t represent them and that speaking as if they’re someone else is a basic skill of fiction writers. The troubling statement, I explain, must appear in the monologue, and it shouldn’t be minimized, nor should students feel the need to forgive or account for it. What’s required is simply that somewhere in the monologue there be an instant — even a fleeting phrase — in which we can feel empathy for the speaker. Perhaps she’s sick with worry over an ill grandchild. Perhaps he’s haunted by a love he let slip away. Perhaps she’s sleepless over how to keep her business afloat and her employees paid. Done right, the exercise delivers a one-two punch: repugnance for a behavior or worldview coupled with recognition of shared humanity.

For more than two decades, I’ve taught versions of this fiction-writing exercise. I’ve used it in universities, middle schools and private workshops, with 7-year-olds and 70-year-olds. But in recent years openness to this exercise and to the imaginative leap it’s designed to teach has shrunk to a pinprick. As our country’s public conversation has gotten angrier, I’ve noticed that students’ approach to the exercise has become more brittle, regardless of whether students lean right or left.

Each semester, I wonder whether the aperture through which we allow empathy has so drastically narrowed as to foreclose a full view of our fellow human beings. Maybe there are times so contentious or so painful that people simply withdraw to their own silos. I’ve certainly felt that inward pull myself. There are times when a leap into someone else’s perspective feels impossible.

But leaping is the job of the writer, and there’s no point it doing it halfway. Good fiction pulls off a magic trick of absurd power: It makes us care. Responding to the travails of invented characters — Ahab or Amaranta, Sethe or Stevens, Zooey or Zorba — we might tear up or laugh, or our hearts might pound. As readers, we become invested in these people, which is very different from agreeing with or even liking them. In the best literature, characters are so vivid, complicated, contradictory and even maddening that we’ll follow them far from our preconceptions; sometimes we don’t return.

Unflinching empathy, which is the muscle the lesson is designed to exercise, is a prerequisite for literature strong enough to wrestle with the real world. On the page it allows us to spot signs of humanity; off the page it can teach us to start a conversation with the strangest of strangers, to thrive alongside difference. It can even affect those life-or-death choices we make instinctively in a crisis. This kind of empathy has nothing to do with being nice, and it’s not for the faint of heart.

Even within the safety of the page, it’s tempting to dodge empathy’s challenge, instead demonizing villains and idealizing heroes, but that’s when the needle on art’s moral compass goes inert. Then we’re navigating blind: confident that we know what the bad people look like and that they’re not us — and therefore we’re at no risk of error.

Our best writers, in contrast, portray humans in their full complexity. This is what Gish Jen is doing in the short story “Who’s Irish?” and Rohinton Mistry in the novel “A Fine Balance.” Line by line, these writers illuminate the inner worlds of characters who cause harm — which is not the same as forgiving them. No one would ever say that Toni Morrison forgives the character Cholly Breedlove, who rapes his daughter in “The Bluest Eye.” What Ms. Morrison accomplishes instead is the boldest act of moral and emotional understanding I’ve ever seen on the page.

In the classroom exercise, the upsetting phrases my students scribble might be personal (“You’ll never be a writer,” “You’re ugly”) or religious or political. Once a student wrote a phrase condemning abortion as another student across the table wrote a phrase defending it. Sometimes there are stereotypes, slurs — whatever the students choose to grapple with. Of course, it’s disturbing to step into the shoes of someone whose words or deeds repel us. Writing these monologues, my graduate students, who know what “first person” means, will dodge and write in third, with the distanced “he said” instead of “I said.”

But if they can withstand the challenges of first person, sometimes something happens. They emerge shaken and eager to expand on what they’ve written. I look up from tidying my notes to discover students lingering after dismissal with that alert expression that says the exercise made them feel something they needed to feel.

Over the years, as my students’ statements became more political and as jargon (“deplorables,” “snowflakes”) supplanted the language of personal experience, I adapted the exercise. Worrying that I’d been too sanguine about possible pitfalls, I made it entirely silent, so no student would have to hear another’s troubling statement or fear being judged for their own. Any students who wanted to share their monologues with me could stay after class rather than read to the group. Later, I added another caveat: If your troubling statement is so offensive, you can’t imagine the person who says it as a full human being, choose something less troubling. Next, I narrowed the parameters: No politics. The pandemic’s virtual classes made risk taking harder; I moved the exercise deeper into the semester so students would feel more at ease.

After one session, a student stayed behind in the virtual meeting room. She’d failed to include empathy in her monologue about a character whose politics she abhorred. Her omission bothered her. I was impressed by her honesty. She’d constructed a caricature and recognized it. Most of us don’t.

For years, I’ve quietly completed the exercise alongside my students. Some days nothing sparks. When it goes well, though, the experience is disquieting. The hard part, it turns out, isn’t the empathy itself but what follows: the annihilating notion that people whose fears or joys or humor I appreciate may themselves be indifferent to all my cherished conceptions of the world.

Then the 10-minute timer sounds, and I haul myself back to the business of the classroom — shaken by the vastness of the world but more curious about the people in it. I put my trust in that curiosity. What better choice does any of us have? And in the sanctuary of my classroom I keep trying, handing along what literature handed me: the small, sturdy magic trick any of us can work, as long as we’re willing to risk it.

Rachel Kadish is the author of the novel “The Weight of Ink.”

The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips . And here’s our email: [email protected] .

Follow the New York Times Opinion section on Facebook , Instagram , TikTok , X and Threads .

CNET logo

Our wellness advice is expert-vetted . Our top picks are based on our editors’ independent research, analysis, and hands-on testing. If you buy through our links, we may get a commission. Reviews ethics statement

Here Are the Exercises You Should Prioritize as You Age, According to Experts

Exercise is a critical part of wellness, although it looks slightly different as we age. Here's how the experts say to do it.

ashlee-tilford

Of all the things we do for our bodies, exercise is one of the most beneficial. It can profoundly affect your balance, mobility and strength. No matter how many candles are on your cake, exercise only gets more important for your health as you age. 

Regular exercise can also be the difference between relying on others for daily activities or maintaining independence. The reality is that your workout routine may need to look a bit different than it did when you were younger. Here are the safe and beneficial exercises for older adults according to experts.

 width=

Is exercise safe for older adults?

A common misconception among the aging population is that exercise is unsafe and should be avoided. This is untrue and works against older adults achieving and maintaining optimal health. Fitness is key to healthy aging . 

An unfortunate fact is that aging increases the risk of many diseases , per the US Centers for Disease Control and Prevention.  Regular physical activity helps to reduce the risk of the same conditions, like Type 2 diabetes, heart disease, cancer and dementia. 

Physical activity is safe for older adults when done correctly and is necessary for a healthy life. The need for exercise among the aging population is strongly supported by the CDC, physical therapists and personal trainers across the globe.

Kevin Robinson , DSc, a physical therapist and professor of orthopedics and kinesiology, shared some general guidelines for safe exercising for older adults: 

  • Focus on minimal-impact activities, like water exercise, recumbent stationary bikes and ellipticals . 
  • Join SilverSneakers programs often offered at local health clubs. These are usually covered by insurance and are designed specifically for older adults. One benefit of these programs is that you can also make friends, which will help you attend consistently. 
  • Focus on certain muscle groups like gluteals (butt), quadriceps (thighs), biceps and abdominals, and know your limits. 
  • Make stretching and balancing exercises part of your regular exercise program. 

 width=

The best exercises for older adults

The best exercises for you will depend on factors like your current fitness level and any medical conditions that require a limited or modified approach. It's never too late to begin a good exercise program . 

The CDC recommends the following weekly physical activity for adults aged 65 and older:

  • 150 minutes a week minimum of moderate aerobic activity, such as brisk walking, or 75 minutes of vigorous activity, like jogging. 
  • Two days a week minimum of strengthening exercises, like lifting weights.
  • Balance improving activities, like balancing on one foot.

Here are some examples of what that exercise routine can look like for older adults. 

1. Moderate cardio 

The CDC defines moderate aerobic activity, also known as cardio, as a 5 or 6 on a scale of one (sitting still) to 10 (working hard). Some activities that are light cardio for one person may be moderate cardio for another.

Walking is a common form of moderate cardio, especially popular with older adults. "Walking can be a great activity," Robinson said. "But many people with arthritis cannot tolerate walking for distances. This is because the average ground reaction force going through the knee is 1.2 to 1.5 times the person's body weight. So, what seems like a minimal impact activity can be too much."

Robinson recommends water exercise for patients with arthritis in their legs or feet. "This reduces the forces through the knee by 50% to 75% as compared to walking on land," he said. Other forms of moderate cardio include hiking, running errands or doing certain chores (like raking leaves), some types of yoga, bike riding and using an elliptical.

2. Light strength exercises

Erin Stimac , personal trainer and group exercise instructor, says functional movements are the foundation for maintaining independence, reducing the risk of injury and enhancing your overall quality of life. Erin recommends incorporating strength exercises that cover essential functional movements:

  • Squatting (sitting and standing): Squatting exercises are vital for regular daily life and contribute to improved mobility and stability.
  • Hinging (bending down): Essential for tasks like picking up objects, hinging exercises strengthen the lower back and promote flexibility.
  • Pushing (body weight or objects): Pushing enhances upper body strength and supports activities like getting up from the ground or lifting objects.
  • Pulling (toward the body): This strengthens the back muscles and is crucial for maintaining posture and balance.
  • Carrying: Life often requires you to carry objects from one point to another. Reduced grip strength has been shown to be closely linked to mortality , predicting risk for early death better than blood pressure. 

Some specific CDC-recommended light strength exercises that can incorporate functional movements include weight lifting, using resistance bands, working in a garden, bodyweight exercises like pull-ups or push-ups, and various yoga postures.

3. Exercises to help your balance

It is common for older adults to have issues with balance. Good balance reduces the risk of falls.

"To improve balance, you need to perform balance activities for short periods of time throughout the day, as opposed to 10 to 15 minutes once a day," said Robinson. He recommends the following balance activities, which can usually be done safely at home:

  • Stand on both feet in front of a counter. Let go of the counter to see how long you can maintain your balance without grasping the counter. Repeat this activity three to five times throughout the day until you've built up to three 45-second periods. Once you've achieved this, move on to the next exercise. 
  • Repeat the balance exercise above, but this time close your eyes. 

Yoga is also a common form of exercise known to improve balance , according to Johns Hopkins Medicine. 

 width=

Exercises older adults should avoid

Are there specific exercises older adults should avoid entirely? According to Stimac, the answer is generally, no. 

"Contrary to common beliefs, there's no need for older adults to shy away from any specific movements," Stimac said. "The fear of injury should not deter them from engaging in strength training. Instead of focusing on limitations, we should explore what movements are suitable for each individual." 

If you have a disease, condition or injury that involves physical limitations, you should always follow the guidance of your medical doctor, but you can still find ways to achieve physical fitness. It simply requires modification and guidance. 

Stimac says there's no one-size-fits-all approach and that every aging person deserves a tailored program that enhances strength and ability while considering individual needs. "By embracing personalized plans and debunking myths, we empower older adults to lead active and fulfilling lives," she said. 

We couldn’t find any results matching your search.

Please try using other words for your search or explore other sections of the website for relevant information.

We’re sorry, we are currently experiencing some issues, please try again later.

Our team is working diligently to resolve the issue. Thank you for your patience and understanding.

Eliminate Assignment and Exercise Risk with Index Options

Investing Image - Editorial Use Pexels

T raders have significantly more variables to account for when trading options over stocks. As an equity investor, only the fluctuation of the underlying affects the profit and loss of a position. However, with options, the underlying price, volatility, time, and even expiration and assignment risks need to be accounted for. In this post we will explore the significant advantage of trading index option that is embedded in the European-style cash settlement process. Eliminating a low probability but potentially severe risk of assignment and exercise risk can lead investors to a shorter learning curve and more consistent results. Additionally, with the launch of the XND, the  Nasdaq-100 Micro Index Option , investors can now access the full benefits of Index options in a retail-friendly size.

European Style Cash Settlement vs. American Style Physical Delivery

European Style Cash Settlement vs. American Style Physical Delivery

Source: OptionsPlay

Why are European Cash Settled options an advantage for traders?

One of the major challenges of options trading is tracking the fluctuations in the underlying security, time, volatility, and interest rates that impact an option's price. These variables already present a challenge for many investors to monitor and account for all of them. However, assignment and exercise risk pose additional headaches for American Style equity options, representing 99% of all stock and ETFs options. As a market strategist, I have witnessed rare but significant exposure with vertical spread trades that have lost substantially more than the max risk of a strategy due to these two risks. European Cash Settled index options outright eliminates these risks.

What is assignment risk, and how can I avoid it?

With American-style options, a call or put can be exercised at any time by the buyer before expiration. Even when a spread is covered by a long option, an early exercise would require a short option holder to have the capital to buy or sell those shares. Most investors with a spread position may not have the cash or margin required to buy or sell the securities of the short leg. Even to exercise the offsetting long option would require the cash or margin to exercise and satisfy the obligation of the short option. For investors without the capital, it forces the broker to liquidate the entire position upon an early exercise.

While this risk cannot be avoided when trading American Style stock or ETF options, European-style Index Options on the Nasdaq-100 eliminate this risk entirely, they simply cannot be exercised early. Especially for new options traders, removing this element of risk is a way to flatten the learning curve and reduce the factors to consider on a trade. However, for investors trading American Style stock or ETF options, this risk can be minimized but not eliminated by closing out short option positions at least two weeks before expiration.

What is exercise risk, and how can I avoid it?

Exercise risks are rare but occur when an investor incorrectly anticipates an underlying security's value immediately after expiration. An example, is a short call or put option that expires worthless and 'out-of-the-Money" (OTM) based on expiration Friday's closing price but opens up Monday' In-the-money" (ITM). In this scenario, a short option investor may be inclined to let their short options expire worthless without buying back the call or put to remove the obligation. However, news, earnings, or other catalysts after the close causes the option buyer to anticipate a favorable move by Monday's open and exercises their option despite it being OTM on expiration Friday. This causes a short option that should have realized its full profit as of Friday's close with no exposure, to be exposed on Monday with a surprise underlying equity position. In comparison, these scenarios are rare but occur when earnings reports or material news are released after the close on Friday. For an index, these could be geopolitical events or macroeconomic news that cause an OTM option buyer to still exercise the call or put.

The best practice for avoiding exercise risk is simply closing out all short option positions, even if they are OTM before expiration. Paying a few cents to buy back a call or put that is nearly worthless will significantly outweigh the risk of exercise risk. However, with European cash-settled index options such as on the Nasdaq-100 Index, options that expire worthless can never be exercised, and gains are settled to cash based on Friday's close, eliminating all exercise risks.

Despite the  benefits and advantages of trading index options , ETF options have historically provided better flexibility on sizing. Index options on the Nasaq-100 Index had large notional value, reducing the ability for smaller retail traders to utilize them. However, with the new  XND product launch , a 1/100 th  value of the full Nasdaq-100 Index, retail traders can have the best of both worlds. XND provides the advantages of index options, with a contract sizing that is roughly a 1/3 rd  of QQQ.

Nasdaq-100 Index and ETF Listed Options

Nasdaq-100 Index and ETF Listed Options

Source: Nasdaq

Trading options involve tracking a significant number of variables, including assignment and exercise risk. While both Index and ETF options provide exposure to the same index European style and cash-settled, which eliminate the assignment and exercise risks embedded in an American style option. Moreover, the tax advantage provided by Index options, can lower a tax bill on similar trades. Lastly, the new retail focused XND product, provide investors of all sizes the ability to benefit from the reduced risk of index options.

To learn more about the launch of XND, don’t miss our Introduction to Trading Index Options webinar. Watch the event replay  here .

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

In This Story

Tony Zhang

Tony Zhang is a specialist in the financial services industry with over a decade of experience spanning product development, research and market strategist roles across equities, foreign exchange and derivatives. As the current Chief Strategist for OptionsPlay, Tony currently leads the research and development of their OptionsPlay Ideas & Portfolio platform. He has leveraged his interest in financial technology and product development to provide innovative reimagined solutions to clients and the users they seek to serve. Previously, he spent 7 years at FOREX.com with a capital markets and research background as a market strategist specializing in equity and FX derivatives markets.

  • Type a symbol or company name. When the symbol you want to add appears, add it to My Quotes by selecting it and pressing Enter/Return.

These symbols will be available throughout the site during your session.

Your symbols have been updated

Edit watchlist.

  • Type a symbol or company name. When the symbol you want to add appears, add it to Watchlist by selecting it and pressing Enter/Return.

Opt in to Smart Portfolio

Smart Portfolio is supported by our partner TipRanks. By connecting my portfolio to TipRanks Smart Portfolio I agree to their Terms of Use .

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

Exercise: Definition and How It Works With Options

exercise or assignment

What Is Exercise?

Exercise means to put into effect the right to buy or sell the underlying financial instrument specified in an options contract . In options trading, the holder of an option has the right, but not the obligation, to buy or sell the option's underlying security at a specified price on or before a specified date in the future.

Key Takeaways

  • In options trading, "to exercise" means to put into effect the right to buy or sell the underlying security that is specified in the options contract.
  • To exercise an option, you simply advise your broker that you wish to exercise the option in your contract.
  • If the holder of a put option exercises the contract, they will sell the underlying security at a stated price within a specific timeframe.
  • If the holder of a call option exercises the contract, they will buy the underlying security at a stated price within a specific timeframe.
  • Before exercising an option, it is important to consider what type of option you have and whether you can exercise it.

Understanding Exercise

If the owner of an option decides to buy or sell the underlying instrument—instead of allowing the contract to expire worthless or closing out the position —they will be "exercising the option," or making use of the right or privilege that is available in the contract.

An options holder may exercise their right to buy or sell the contract's underlying shares at a specified price—also called the strike price.

  • Exercising a put option allows you to sell the underlying security at a stated price within a specific timeframe.
  • Exercising a call option allows you to buy the underlying security at a stated price within a specific timeframe.

To exercise an option, you simply advise your broker that you wish to exercise the option in your contract. Your broker will initiate an exercise notice , which informs the seller or writer of the contract that you are exercising the option. The notice is forwarded to the option seller via the Options Clearing Corporation (OCC). The seller is obligated to fulfill the terms of an options contract if the holder exercises the contract.

The decision to exercise an option isn't always a clear-cut one. There are several factors that need to be considered and, more often than not, it's safer to hold or sell the option instead.

The majority of options contracts are not exercised but, instead, are allowed to expire worthless or are closed by opposing positions. For example, the holder of an option can close out a long call or put prior to expiration by selling it, assuming the contract has market value.

If an option expires unexercised, the holder no longer has any of the rights granted in the contract. In addition, the holder loses the premium they paid for the option, along with any commissions and fees related to its purchase.

Things to Consider When Exercising an Option

  • What kind of option do you have? This is very important, as contracts have different guidelines. American-style contracts allow you to exercise them before their expiration date. European options may be exercised only after the contract has expired.
  • Can you exercise your options? In some cases, such as with employee stock ownership plans (ESOPs), your shares may be vested , meaning that you will need to wait a set amount of time before you exercise the option.
  • Will the cost outweigh the benefits? Exercising a contract costs you commission money, so make sure that the exercise price will make you money; otherwise, you'll end up paying more in fees and will lose out on any potential profit.
  • Are there taxes involved? You will want to consider any tax implications associated with the type of contract you are exercising. An employee cashing out an ESOP, for example, will have to pay additional tax.

exercise or assignment

  • Terms of Service
  • Editorial Policy
  • Privacy Policy
  • Your Privacy Choices

PE 231- Exercise Plan Assignment

  • Health Science

Webull

  • Transfer Webull to E*Trade
  • Regulation T Extension Fee
  • Wells Fargo Options Trading
  • Schwab Guardian Account
  • American Funds Transfer Fee

webull

  • Privacy Policy
  • Terms Of Service

IRA-Reviews.com provides reviews of services based on our personal opinions. We may be compensated by the businesses we review. The content presented on IRA-Reviews.com does not constitute investment advice and should not be used as the basis for any investment decision. Copyright 2011-2024 IRA-Reviews.com. All rights are reserved.

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

B. James

  • January 3, 2023
  • Options and Derivatives

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

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

What is option assignment?

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

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

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

Stay up to date!

Weekly news and knowledge for options traders. 

You’ve been subscribed! Check your inbox for weekly updates.

Reasons for assignment

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

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

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

How to avoid option assignment

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

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

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

Does option assignment count as a day trade?

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

What is dividend risk ?

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

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

exercise or assignment

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

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

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

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

Related Posts

exercise or assignment

Synthetic Covered Call: What It Is & Examples

  • September 4, 2023

exercise or assignment

Notional Value vs Market Value: What’s the Difference?

  • August 29, 2023

exercise or assignment

What Is Backwardation? Overview, Examples, Causes

  • August 27, 2023

exercise or assignment

exercise or assignment

Assignment and Exercise

Regular assignment/exercise – The settlement price of an option is the official closing price at the end of the day on its expiry. The closing price of the stock on expiry establishes which options are in the money and subject to auto-exercise/assignment. Any option that’s in the money on the expiration date is automatically exercised unless the option owner specifically requests to not exercise. After-hours movement in the stock does not affect the settlement price but it may affect do not exercise notices (example, a stock closes at 100.50, after hours drops to 95 on news, the owner of a 100 call may submit a do not exercise notice to avoid owning stock for $100)

Early assignment/exercise – For a variety of reasons the holder of an option may want to exercise the contract early, before expiry. This is typically done when the option is at or close to 100 deltas and in the money. The reason for that is the holder immediately gives up any extrinsic time value of the option and simply converts the intrinsic value of their option to stock.

With multi leg option spreads, an early assignment of a short leg converts the trade to a complex position consisting of stock and options. The risk profile of the trade itself does not dramatically change after early assignment but the margin or required capital often does and therefore action is typically taken by the trader, either through early exercise or closing the position.

Free From Options AI

Options ai tools home.

Expected moves, unusual options activity, earnings data, stock scanner and much more! Yours FREE from Options AI.

Earnings Calendar with Expected Moves

See expected earnings moves to help decide whether to trade or fade the move.

Compare Expected Moves

Skip the chains and compare expected moves across multiple stocks.

Options University

Quickly advance your understanding of income and debit spreads with our short video series. 

exercise or assignment

  • Announcements 14
  • The Orbit 332
  • Uncategorized 10
  • User Guide 11
  • Video Series 11

Open an account

Learn more about Options AI and apply for an account.

Stay in the loop

Be the first to hear product announcements and get daily market content from The Orbit.

IMAGES

  1. Option Exercise and Assignment Explained w/ Visuals

    exercise or assignment

  2. Option Exercise and Assignment (Best Guide w/ Examples)

    exercise or assignment

  3. What are Exercise & Assignment

    exercise or assignment

  4. Exercise physiology assignment

    exercise or assignment

  5. Write effective assignment in short time: College management for students

    exercise or assignment

  6. Options 101: Exercise vs Assignment

    exercise or assignment

VIDEO

  1. 12 Principles of Animation with a Flour Sack

  2. PE 125 Module Assignment 4: Cardio Class Exercise Demonstration

  3. Exercise Phys Assignment

  4. Assignment 1.3 How too

  5. SPS 245 Individual Assignment (Decline Bench Press Exercise Demo)

  6. ASSIGNMENT: EXERCISE WAVELENGTH

COMMENTS

  1. How to exercise, roll, and assign options

    5 min Exercising your options The key things to know about managing options, including exercise, assignment, and roll. Fidelity Active Investor 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.

  2. Options Exercise, Assignment, and More: A Beginner's Guide

    A short call assignment results in selling the underlying stock at the strike price. A long put exercise results in selling the underlying stock at the strike price. A short put assignment results in buying the underlying stock at the strike price.

  3. Assignment vs Exercise

    Noun ( en noun ) The act of assigning; the allocation of a job or a set of tasks. This flow chart represents the assignment of tasks in our committee. The categorization of something as belonging to a specific category. We should not condone the assignment of asylum seekers to that of people smugglers. An assigned task.

  4. 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.

  5. Expiration, exercise, and assignment

    Expiration, exercise, and assignment Expiration What it Means Unlike a stock, each option contract has a set expiration date. The expiration date significantly impacts the value of the option contract because it limits the time you can buy, sell, or exercise the option contract.

  6. Learn About Exercise and Assignment

    Exercise and Assignment Options buyers exercise their options. Options sellers are assigned when an option is exercised. Exercising your right A call option is the right to buy the underlying future at the strike price. The process for activating that "right", is called "exercising the right" or simply to "exercise" the option.

  7. The Risks of Options Assignment

    An assignment forces the short options seller to take action. Here are the main actions that can result from an assignment notice: Short call assignment: The option seller must sell shares of the underlying stock at the strike price. Short put assignment: The option seller must buy shares of the underlying stock at the strike price.

  8. Exercising Options: How & When To Exercise Options

    There is generally no exercise or assignment activity on options that expire out-of-the-money. Owners usually let them expire with no value. Although this is not always the case as post-market underlying moves may lead to out-of-the-money options being exercised and in-the-money options not being exercised. For illustrative purposes only.

  9. Option Contract Terms: Exercise, Assignment, Delivery, and Settlement

    Out-of-the-money options expire worthless. If you own an option that's exercised, you'll receive a cash payment of the intrinsic value (the difference between the strike price and the settlement price of the underlying index or other security) times the contract's multiplier. The multiplier on SPX options is $100.

  10. The Mechanics of Option Trading, Exercise, and Assignment

    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.

  11. Options Settlement Guide

    Exercise and assignment of options refers to the process of settlement in accordance with the terms of the contract. Exercise and assignment of options contracts are two sides of the same transaction. An option buyer has the right to exercise an options contract.

  12. Exercise & Assignement

    The buyer has the right to exercise the option at any time and assign stock to the seller that they are obligated to buy or sell (based on the type of option) at the strike price. The buyer profits from the option price going up. - Option Writer/Seller: Writes and sells the option to the buyer and collects the premium.

  13. Should an Investor Hold or Exercise an Option?

    The exercise and assignment process is automated and the seller, who is selected at random from the available pool of investors holding the short options positions, is informed when the...

  14. Option Exercise and Assignment Explained w/ Visuals

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

  15. Exercising Options

    There is generally no exercise or assignment activity on options that expire out-of-the-money. Owners usually let them expire with no value. Although this is not always the case as post-market underlying moves may lead to out-of-the-money options being exercised and in-the-money options not being exercised. READ MORE ON ASSIGNMENT (PDF)

  16. Early Exercise Options Strategy

    OPTIONS PLAYBOOK. Early exercise happens when the owner of a call or put invokes his or her contractual rights before expiration. As a result, an option seller will be assigned, shares of stock will change hands, and the result is not always pretty for the seller. (It's important to note that when talking about early exercise and assignment ...

  17. The Most Important Writing Exercise I've Ever Assigned

    Unflinching empathy, which is the muscle the lesson is designed to exercise, is a prerequisite for literature strong enough to wrestle with the real world. On the page it allows us to spot signs ...

  18. Option Expiration, Exercise, Assignment, and the Potential Risks

    After Expiration: In the event the exercise/assignment results in a Reg T or a Money Due Call - you can avoid restrictions/penalties if you cover the call on T+1 of expiration date. Early Exercise of Options: If you would like to submit an early exercise request you can do so from the app or by speaking to a broker. Currently, the exercise in ...

  19. Here Are the Exercises You Should Prioritize as You Age ...

    150 minutes a week minimum of moderate aerobic activity, such as brisk walking, or 75 minutes of vigorous activity, like jogging. Two days a week minimum of strengthening exercises, like lifting ...

  20. Eliminate Assignment and Exercise Risk with Index Options

    However, assignment and exercise risk pose additional headaches for American Style equity options, representing 99% of all stock and ETFs options. As a market strategist, I have witnessed rare...

  21. Exercise: Definition and How It Works With Options

    Exercise means to put into effect the right specified in a contract. In options trading, the option holder has the right, but not the obligation, to buy or sell the underlying instrument at a ...

  22. PE 231- Exercise Plan Assignment (pdf)

    Health Science. Skylar Lamke 10/26/2016 PE 231, 8am-9am Personal Exercise Plan Assignment My Exercise Prescription : #1 Cardiorespiratory Fitness Mode: Aerobic Exercises- Swimming, hiking, and zumba fitness. Anaerobic Exercises- Running, Sprinting, and using stationary bike (high intensity) Frequency: 3-5 days a week Intensity: Heart Rate ...

  23. How do options exercise and assignment work?

    Some option traders may never experience an option exercise or assignment. In this lesson, we'll walk through each process and explain how dividend risk may ...

  24. What Is Options Assignment Fee? What Is Options Exercise Fee?

    Exercise and assignment When an option is exercised, this means that the call holder buys the stock, while the put holder sells the stock. Options Clearing Corporation (OCC) is a central clearinghouse and regulator for options traded in the U.S. and is regulated by the SEC.

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

    However, the exercise or assignment of an option contract does not count as a day trade. What is dividend risk? Dividend risk is only a consideration for short, in-the-money call options on an underlying which pays dividends. It's most likely to occur on the ex-dividend date for the stock on options with less extrinsic value left than the ...

  26. Assignment and Exercise

    Early assignment/exercise - For a variety of reasons the holder of an option may want to exercise the contract early, before expiry. This is typically done when the option is at or close to 100 deltas and in the money.