When Do Covered Calls Get Assigned?

Covered calls are a widely used options strategy, offering a way for investors to generate income from shares they already own. This strategy involves selling call options against an existing stock position, allowing the seller to collect a premium. While attractive for income generation, covered calls come with the possibility of “assignment,” which means the seller must deliver their shares.

Defining Assignment in Covered Calls

Assignment, in the context of covered calls, refers to the obligation of the option seller to fulfill the terms of the option contract. When a covered call is assigned, the seller is required to deliver their shares of the underlying stock at the agreed-upon strike price to the option buyer. This occurs because the option buyer has chosen to “exercise” their right to purchase those shares. The seller’s shares are “called away” at the strike price, regardless of the current market price.

The covered call strategy is named “covered” because the seller already owns the shares necessary to meet this potential obligation. The possibility of assignment is an inherent feature of selling covered calls, capping the potential upside profit on the underlying stock at the strike price plus the premium received.

Key Triggers for Assignment

Assignment occurs under specific market conditions, primarily when the covered call option is in-the-money (ITM) at or near its expiration. An option is considered ITM for a call when the underlying stock’s price rises above the strike price. At expiration, if a call option is ITM, even by a minimal amount such as $0.01, it is automatically exercised by the Options Clearing Corporation (OCC) on behalf of the option buyer.

Beyond expiration, early assignment can also occur, though it is less common. One primary reason for early exercise by an option buyer is to capture an upcoming dividend. If the dividend amount exceeds the remaining time value of the option, a buyer might exercise their right to own the stock before its ex-dividend date to receive the dividend payment. This situation particularly increases the likelihood of early assignment for deep ITM options, where the time value is minimal.

Another scenario for early assignment, albeit less frequent, involves deep in-the-money options that have little to no extrinsic value remaining. In such cases, the option holder might exercise to take immediate possession of the shares or to lock in profits. The stock’s price movement relative to the strike price is the dominant factor influencing assignment likelihood, with time decay generally reducing the chance of early assignment as expiration approaches, unless a dividend is involved.

The Mechanism of Assignment Notification and Delivery

When an option buyer decides to exercise their right, the process of assignment is managed by the Options Clearing Corporation (OCC), which acts as the central clearinghouse for options transactions. The OCC receives the exercise notice from the buyer’s brokerage firm and then employs a random lottery system to allocate that exercise notice to a clearing member firm that holds a short position in that specific option series. This random selection ensures fairness across all sellers of that particular option.

Once the clearing member firm, typically a brokerage, receives the assignment notice from the OCC, it then uses its own approved method to assign the obligation to one of its clients who sold that specific call option. Common methods for this internal allocation include a random process or a first-in, first-out (FIFO) basis. The covered call seller receives notification of the assignment from their brokerage firm, often through email, a platform notification, or an update to their account statement.

Upon assignment, the seller’s shares are debited from their account and transferred to the option buyer’s account. Concurrently, the cash equivalent to the strike price multiplied by the number of shares (100 shares per contract) is credited to the seller’s account. This transfer of shares and cash occurs within the standard settlement period. For most stock transactions, including those resulting from option assignment, the settlement period is one business day (T+1) after the transaction date.

Post-Assignment Outcomes for the Seller

When a covered call is assigned, the most direct outcome for the seller is the removal of the underlying shares from their investment portfolio. These shares are sold at the strike price, fulfilling the obligation of the option contract. As a result, the seller no longer owns the stock and cannot benefit from any further price appreciation beyond the strike price.

In return for the shares, the seller receives cash equivalent to the strike price per share, multiplied by the number of shares delivered (typically 100 shares per contract). The premium initially collected when the covered call was sold is retained by the seller, contributing to the overall financial outcome of the trade. The total profit or loss from the assigned covered call is calculated by considering the original purchase price of the stock, the strike price at which it was sold, and the premium received. The maximum profit for a covered call is limited to the premium received plus the difference between the strike price and the original stock purchase price.

The sale of shares due to assignment constitutes a taxable event, which may result in a capital gain or loss for the investor. The tax implications depend on the holding period of the underlying stock and its original cost basis. If the stock was held for more than one year, any gain is considered a long-term capital gain, subject to different tax rates than short-term gains. Following assignment, the seller’s portfolio composition changes from holding shares to holding cash, necessitating new investment decisions.