Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
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Option assignment occurs when the buyer of an options contract chooses to exercise their puts or calls. That means they wish to trade the underlying security at the strike price set in the contract, which the options contract seller is obligated to fulfill.
While relatively few options contracts are ever exercised, options writers should be mindful of assignment risk. Options assignment requires writers to buy or sell the underlying security at the strike price.
As with all options trading, it’s important to know and understand all of the key risks. American-style options can be exercised at any time before and on the date of expiration, which means sellers might be faced with option assignment whenever they hold a short position. Option assignment is also more likely as expiration nears.
Key Points
• Option assignment occurs when a contract buyer exercises their right to buy or sell the underlying asset, and the seller is required to fulfill the contract.
• American-style options may be assigned at any point before or at expiration.
• European-style options may only be exercised and assigned on the expiration date.
• Only sellers of options face assignment risk, including in multi-leg strategies with short positions.
• The Options Clearing Corporation randomly allocates assignments to brokers, who then pass the assignment on to accounts that are holding the contract.
What Is Option Assignment?
Writers (or sellers) of option contracts assume the obligation to buy or sell shares if the option is exercised by the buyer, satisfying the terms of the options contract. Buyers (or) holders of options contracts purchase the right to exercise these options under the terms of the options contract.
Option assignment is the process of matching an exercised option with a seller who is obligated to fulfill the contract. In options trading, a seller must fulfill the contract terms if the buyer exercises the option. The seller does this by either purchasing or selling a specific number of shares of the underlying stock from or to the buyer.
The option contract buyer, also called a holder, has the right but not the obligation to buy (in the case of a call option) or sell (in the case of a put) a predetermined number of shares of the underlying asset at a strike price. It is only when the option contract holder elects to exercise, that option assignment happens. The individual shorting the option (i.e., the seller of the option) must then abide by the contract’s provisions.
How Does Option Assignment Work?
Option assignment is when the seller must complete the terms outlined in an options contract after the call or put contract owner chooses to exercise their option and submits an exercise notice. By selling an option, the seller grants the buyer the right to buy or sell a standardized number of shares at a predetermined price in the future. Any option strategy that has a short leg, such as a bull put credit spread, may involve assignment risk.
Call options offer the owner the right, but not the obligation, to buy stock while put options give the holder the right, but not the obligation, to sell shares. The call option seller, on the other hand, would potentially be required to buy stock in order to sell it to the call option owner.
Writers of bond options also face assignment risk.
A Peek Under the Hood
The mechanics of option assignment can seem unclear since there are so many options contracts traded, and it’s hard to determine who is on the other side of your trade.
Options trade through exchanges, and since they are standardized contracts, the exchange is essentially the counterparty to an option trader until an option is exercised. The entity in charge of facilitating exercises and assignments in the U.S. is the Options Clearing Corporation (OCC). Option assignment rules are followed, and the OCC ensures a fair process.
An options assignment begins when an option holder notifies their broker, who then submits an exercise notice to the OCC. The OCC randomly allocates this assignment to brokerage firms that have clients who are short that contract using a lottery-style process. The brokerage firms then use their own rules and processes to allocate the assignment to a specific client, though many use a similar random allocation method.
The two parties to the assignment are not required to be the same two parties that entered into the original options contract because options are fungible and centrally cleared.
Can You Know If a Position Will Be Assigned?
According to the Options Industry Council (OIC), it’s hard to know when you, as the seller, will be assigned, as it can happen any time up to expiration for American-style options. Many index options, or index futures options, are European-style however.
It may be helpful to know that just 7% of option holders exercise their right, and that percentage has not budged much over the years, according to the OIC.
Can You Do Anything If a Position Is Assigned?
You must meet your option assignment duties once you are assigned. What’s nice, though, is that many brokers handle the process automatically for you. Traders should be prepared to see their account balances fluctuate when an assignment happens. When trading futures options, you might also see a cost of carry with the underlying futures contracts.
Finally, user-friendly options trading is here.*
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*Check out the OCC Options Disclosure Document.
What Happens After a Position Is Assigned?
A writer facing an options assignment will be notified through their brokerage firm after the OCC allocates the exercise notice.
A seller of call options must deliver shares at the strike price and in return receives cash equal to the strike price multiplied by the number of shares specified in the contract. If the seller wrote covered calls — and therefore owns the shares in their account — their brokerage can simply transfer the shares from one account to the other, and the seller will receive the strike price for each sold share, regardless of the stock’s current market price.
If the seller sold naked calls, they will be required to buy shares on the open market to provide them to the options holder, but will still receive the strike price per share, regardless of market price. If the seller has pursued a combination options strategy, it might be possible to exercise another option to satisfy the terms of the assigned option. Whether this is feasible depends on the structure and margin requirements of the remaining position.
For someone short puts facing option assignment, they are obligated to buy shares at the exercise price from the holder of the option. If the put seller pursued a cash-secured put strategy, they will have the cash in their account to make the purchase of shares at the strike price upon assignment. If the seller does not have the cash, they will have to deposit sufficient funds or sell account assets to fund the obligatory assignment purchase.
Option Assignment Example
It helps to run through an options assignment example to grasp how the process works.
Let’s say you were bearish or neutral on the price of XYZ stock over the coming 30 days and expected high implied volatility for call options on that stock. After analyzing the option Greeks, you decide to sell $100 strike call options while the shares trade at $95. The option premium you collect is $10.
After three weeks, the stock has jumped to $105, and the short calls are worth $6. You are alerted that you now face a call option assignment. To meet the requirements of option assignment, you must deliver shares to the individual who exercised the call option. You can buy shares in the market or, if you own shares and wrote a covered call, your shares might be called away.
For puts, the purchaser of the option sells (or “puts”) shares to the writer, who is required to purchase the shares at the strike price.
Option Assignment and Multi-Leg Strategies
Some of the more complex options trading strategies, like those involving many legs, may involve increased exposure to option assignment risks. If just one leg of a broader trade is assigned, the writer must act to preserve the strategy’s intended risk profile. That might involve closing the entire strategy or modifying the other legs to manage risk.
Once an option seller’s position is assigned, the trader must meet the contract’s terms to buy or sell shares of the underlying security, regardless of what other legs remain open or are part of a multi-leg strategy.
What Does Assignment Mean for Individual Investors?
Options assignment is just another risk to be mindful of when selling puts and calls as part of an options strategy or standalone trade. While there are plenty of upshots to writing options, such as collecting premium, assignment risk remains a key consideration. It’s important that you check with your brokerage firm to understand their option assignment process and cut-off times. Some firms might have significant costs while others may waive fees for option assignment.
The Takeaway
Option assignment happens to writers of contracts when the owner of puts or calls elects to exercise their right. Options sellers are then required to purchase or deliver shares at the strike price to the individual exercising. Option assignment is facilitated by the OCC, which uses a lottery-style process to randomly select member brokerage firms with short positions, which in turn identify sellers for assignment.
Option sellers face assignment risk, but traders can help avoid the risk by holding long option positions rather than short ones.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
FAQ
How is option assignment determined?
Option assignment is determined by the OCC, which randomly assigns firms that have accounts short options. This only happens once an options contract holder chooses to exercise their option. While a small portion of options contracts are exercised, traders should understand the risks, particularly as expiration nears, as that is when assignments may become more likely.
Are options assigned before or after expiration?
American-style options can be exercised, and thus assigned, any time before and on the expiration date. European-style options, however, can only be exercised at expiration. Be sure to know the style of options contract you are selling so that you know your option assignment risk.
What are option assignment fees and how much are they?
Options assignment fees vary by brokerage. These days, trading commissions to fulfill obligations from being short an options contract are generally reasonable. There could be a base options trading fee plus a per contract charge, but some brokers may waive assignment fees entirely.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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