When Do Options Get Assigned? How the Process Works

Options contracts give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price by a certain date. These contracts are derivatives, meaning their value is derived from an underlying asset such as stocks, indices, or exchange-traded funds. For the seller, or “writer,” of an option, they assume an obligation to fulfill the contract if the buyer chooses to exercise their right. This obligation is known as “assignment,” a process where they are required to uphold their side of the agreement. Understanding assignment is important for anyone selling options, as it directly impacts their financial position and responsibilities.

Understanding Assignment

Assignment is the option writer’s obligation to fulfill the contract when an option holder decides to exercise their right. Unlike the option buyer who has a choice, the seller must act according to the contract’s specifications. The specific action required from the writer depends on whether they sold a call option or a put option.

For writers of call options, assignment means they are obligated to sell the underlying asset, typically shares of stock, at the predetermined strike price. If the call writer does not already own the shares, they must acquire them at the current market price to deliver them to the exercising buyer. Conversely, for writers of put options, assignment requires them to buy the underlying asset at the strike price. They must accept delivery of the shares from the exercising buyer and pay for them according to the contract’s terms. The core distinction lies in the option buyer’s right to exercise versus the option seller’s obligation to be assigned.

When Assignment Occurs

An option writer can be assigned when the option holder chooses to exercise their contract. One common scenario occurs at expiration, particularly for options that are “in-the-money” (ITM). For a call option, it is ITM if the underlying asset’s price is above the strike price at expiration. For a put option, it is ITM if the underlying asset’s price is below the strike price at expiration. In such cases, the Options Clearing Corporation (OCC) typically exercises these options automatically on behalf of the holder, resulting in assignment for the writer, unless the holder provides specific instructions otherwise.

Beyond expiration, early exercise is another circumstance where assignment can occur, specifically for American-style options. Most equity options traded in the United States are American-style, which allows the holder to exercise their right at any time before the contract’s expiration date. Common reasons for early exercise include an option being deep in-the-money, where significant profit can be locked in, or for call options, to capture an upcoming dividend payment from the underlying stock. European-style options, by contrast, can only be exercised on their expiration date, limiting the potential for early assignment for writers of these contracts.

How Assignment Happens

The process begins with the Options Clearing Corporation (OCC), which acts as the central clearinghouse for all listed options contracts. When an option holder decides to exercise their contract, their brokerage firm sends an exercise notice to the OCC. The OCC then facilitates the assignment process by randomly selecting a clearing member, typically a brokerage firm, that holds an open short position in that specific option series.

Once a brokerage firm is selected by the OCC, it uses its own internal methodology to determine which of its clients with a short position will be assigned. While many firms employ a random allocation method, some might use other procedures such as a first-in, first-out (FIFO) approach. After a client is chosen, their brokerage firm typically notifies them of the assignment through various channels, such as email or an account notification.

What Happens After Assignment

Once an option writer receives an assignment notice, their brokerage account is affected. For those who wrote call options and are assigned, their account will be debited for the shares they must deliver to the exercising buyer. If the writer does not already own the underlying shares, they will need to purchase them at the current market price, and their account will then be credited with the strike price received from the buyer. If they held the shares, those shares will be removed from their account.

Conversely, for writers of put options who are assigned, their account will be debited for the strike price, which is the amount they must pay to acquire the shares. Simultaneously, their account will be credited with the shares they are obligated to buy from the exercising holder. Most equity options result in the physical delivery of shares. However, some options, such as those on broad-market indexes, are cash-settled, where only the cash difference between the strike price and the underlying asset’s value is exchanged. Assignment can also impact an account’s buying power and may trigger additional margin requirements.