Options Assignment: The Mechanics And The Plan

Assignment is what happens when you sold an option and the buyer of that option exercises their right against you. You become obligated to fulfill the contract. Sold a put that expires in the money: you buy 100 shares at the strike. Sold a call that expires in the money: you sell 100 shares at the strike.

If you understand assignment before you sell options, it is a tool. If you do not understand it, it is a surprise that costs money.

How Assignment Works

• Long option holder decides to exercise.
• The Options Clearing Corporation (OCC) receives the exercise notice.
• OCC randomly assigns the obligation to one of the short option positions on the same strike and expiration.
• The assigned trader's broker executes the share transaction overnight.
• The trader wakes up the next day with shares (if it was a put) or short shares (if it was a call against held stock).

Short Put Assignment

You sold a $50 strike put. Stock closes at $48. Buyer exercises. You buy 100 shares at $50. The shares are worth $48 in the market, so you are immediately down $200 per contract before counting the premium you collected.

If you collected $1.50 in premium ($150), your net cost basis is $48.50 per share. Same as buying shares at the market and then some. The premium offset the assignment cost partly.

Short Call Assignment

You sold a $60 strike call against 100 shares you own at a cost basis of $55. Stock closes at $63. Buyer exercises. You sell your 100 shares at $60. You collected the $60 sale price plus the premium from selling the call. You miss the gain above $60.

This is the standard covered call assignment. Capped upside, premium collected.

When Assignment Happens

Most assignment happens at expiration. Brokers automatically exercise any long option that is in the money by one cent. Your short option on the other side gets assigned.

Early assignment is rarer but happens. The two main triggers:

• Dividend capture on short calls. If you sold a call on a dividend paying stock and the call is in the money near the ex dividend date, expect early assignment so the long holder can capture the dividend.
• Deep in the money positions with no extrinsic value. The long holder takes their profit by exercising instead of selling the option.

How To Avoid Assignment

Close the short option before it expires in the money. Buy to close at any time during market hours. You pay the cost to close, you keep the difference between credit collected and cost paid.

Roll out: close the current short and open a new short at the same or different strike in a later expiration. Net credit if you can. Buys you more time for the trade to work.

Close intraday if the strike comes under threat. Do not wait for expiration to react. Make the decision while you have liquidity.

When Assignment Is The Plan

Cash secured puts are designed to result in assignment if the strike is breached. You wanted to own the shares at that price anyway. Assignment is the outcome you planned for. You take the shares and either hold or start selling covered calls (the wheel strategy).

Covered calls similarly accept assignment as a possible outcome. If the call gets called away, you sold your shares at the strike for a planned gain plus the call premium.

Naked short options without a plan for assignment are the dangerous version. You did not size for it. You do not have the cash to take the assignment. The result is a forced position you cannot afford.

What Brokers Do Automatically

• Exercise any long option in the money by one cent at expiration.
• Assign your short option on the other side of any automatic exercise.
• Use margin if you do not have enough cash to take the assignment. This can trigger a margin call.
• Liquidate other positions if margin is exceeded. You do not get to pick which positions.

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