Option Assignment

Option Assignment Overview

Option assignment is when an option seller is required to fulfill the obligation of the option per the contract’s terms. If an option buyer exercises their right to buy or sell shares of stock at the strike price, the option seller must honor this request and fulfill their obligation. Option assignment is random and cannot be refused.

Options can be assigned until 30 minutes after the market closes (4:30 pm EST). An option must be closed before the end of the market day to avoid potential assignment. If a short option is not closed before the market closes at 4:00 pm EST, the option is subject to assignment.

If assigned a call option, you must sell 100 shares per contract at the option’s strike price. Conversely, if you are assigned a put option, you’re required to buy 100 shares per contract at the option’s strike price.

How Option Assignment Works

Option assignment occurs when the owner of an option exercises their right to buy or sell the underlying asset at a specific price on or before expiration. When a call option is assigned, the owner buys shares at the strike price.

For example, if XYZ stock is trading for $45 and you sold one XYZ 50 Put, the put buyer has the right to sell 100 shares of XYZ at $50 any time until expiration. If XYZ drops below $50 before expiration and the buyer exercises the option, then you will be assigned 100 shares at $50 and are obligated to purchase the shares.

The OCC facilitates the assignment process.

How to Avoid Early Option Assignment

Options are typically assigned near expiration when the strike price is in-the-money (ITM). Option buyers tend to hold the contract as long as possible to capture as much extrinsic value as possible. To manage assignment risk and potentially avoid assignment, you should consider closing short options with intrinsic value near expiration.

You can use Option Alpha automations to manage assignment risk. It is important to note that there is no way to guarantee you’ll avoid assignment, but you can use a series of decision recipes to check for key contributing factors such as days until expiration and moneyness automatically inside a bot.

Best Practices: What to Know About Assignment

1. Don’t panic! Assignment comes with the territory when selling options. Typically, your broker will give you a day to exit the assigned position. Check with your broker for specific details about their assignment process.
2. Use vertical spreads. Credit spreads have defined risk, so you know your max potential loss. A credit spread’s max loss is the premium received minus the spread width. For example, if you sell a $5 wide spread and collect $2, your max loss is -$300 per contract. So, even if the short option is $8 ITM and assigned, you can exercise the long option for $3. Added to the initial $2 premium, your loss is -$300.
3. If you have enough capital to cover the cost of assignment (and the appropriate margin account type for holding short stock if a call option is assigned), you can consider holding the position if you believe it will become profitable.

Remember, option assignment is rare. The majority of options contracts are closed prior to expiration or expire worthless, and assignment does not typically occur. According to the OCC, options holders only exercise about 8% of options contracts.

FAQs

What is Option Assignment?

Option assignment is when an option seller is required to fulfill the obligation of the option per the contract’s terms. If an option buyer exercises their right to buy or sell shares of stock at the strike price, the option seller must honor this request and fulfill their obligation.

Why do Options get Assigned?

The most common reason for an option to be assigned is when it is in-the-money (ITM) and near expiration. At this point, there is no financial incentive for the buyer not to exercise the option since they will make money, because there is little to no extrinsic value remaining.

What Time does Option Assignment Occur?

Although the stock market closes at 4 pm EST, options can be exercised until 4:30 pm EST on the day of expiration.

What Happens to In-The-Money Call Options at Expiration?

If a call option is in-the-money at expiration, it will be exercised automatically. The buyer of the long call option will be delivered shares of the underlying security per the terms of the contract, and the buyer will, therefore, be long stock. The long call seller will be obligated to deliver shares of the underlying security and, therefore, be short stock.