Assignment and Exercise: What Happens at Expiration and Before It

Exercise vs. Assignment (and Why You Care)

Exercise is what the option buyer chooses (or has happen automatically) to turn the option into stock: calls become a purchase of shares; puts become a sale of shares. Assignment is what happens to the option seller when a buyer exercises: the seller is “assigned” the obligation and must deliver on the contract terms.

Practical translation:

• If you bought a call and it’s exercised, you buy shares at the strike.
• If you sold a call and you’re assigned, you must sell shares at the strike (deliver shares).
• If you bought a put and it’s exercised, you sell shares at the strike.
• If you sold a put and you’re assigned, you must buy shares at the strike (take shares).

Assignment is not “personal.” If you sold an option, you can be assigned when any holder of that option series exercises, and the clearing system randomly allocates assignment among short positions.

American-style vs. European-style (Practical Difference)

American-style options can be exercised any time up to expiration (including before expiration). Most single-stock equity options are American-style. This is why early assignment is possible.

European-style options can be exercised only at expiration. Many index options are European-style. With these, you generally don’t face early assignment risk (though settlement rules can still create surprises if you don’t understand cash settlement vs. physical delivery).

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Beginner takeaway: if you’re trading stock options, assume early assignment is possible; if you’re trading certain index options, early exercise is typically not a thing, but you must understand the settlement method.

Expiration Outcomes: What Typically Happens

OTM at Expiration: Expires Worthless

If an option finishes out of the money (OTM) at expiration, it typically becomes worthless. The contract disappears from your account after expiration processing.

• Long OTM option: you lose the premium paid (already paid earlier), and the position goes to zero.
• Short OTM option: you keep the premium received, and the position is removed.

ITM at Expiration: Typically Exercised/Assigned

If an option finishes in the money (ITM) at expiration, it is typically exercised by the holder, which means short positions are typically assigned.

Important nuance: “ITM” is usually determined by the official closing price (or a specified cutoff price) and the broker/clearing rules for that option. Small differences around the strike can matter.

What “Automatic Exercise” Means

Most brokers follow an automatic exercise policy: if a long option is ITM by at least a certain threshold at expiration (commonly $0.01), it will be exercised automatically unless the holder gives instructions not to exercise (“do not exercise”).

Practical implications:

• If you are long an ITM option near expiration, you may wake up to a new stock position (and cash/margin changes) even if you didn’t place an exercise order.
• If you are short an ITM option, you should assume you can be assigned and end up with a stock position (short shares for short calls; long shares for short puts).

Also note: some options stop trading earlier than you expect, and after-hours price moves can change whether an option ends up ITM. This is a common source of “I thought it would expire worthless” surprises.

Early Assignment: When It Can Happen and Why

Early assignment occurs when an option holder exercises before expiration. This is primarily a risk for option sellers in American-style options.

Why Calls Get Assigned Early (Especially Around Ex-Dividend)

Early exercise of calls is usually irrational unless there is a specific benefit to owning the shares now. The most common reason is to capture a dividend.

Typical setup:

• You sold a covered call (or a naked call) that is ITM.
• The stock has an upcoming ex-dividend date.
• The call holder may exercise the day before ex-dividend to own shares on the record date and receive the dividend.

Practical rule of thumb: early call exercise becomes more likely when the dividend you can collect is greater than the remaining extrinsic value (time value) in the call. If there’s very little extrinsic value left, the holder gives up little by exercising early.

Why Puts Are Less Commonly Assigned Early (But Can Be)

Early exercise of puts can make sense when:

• The put is deep ITM and has little extrinsic value left.
• Interest rates and carrying costs make it beneficial to receive cash sooner (by selling shares at the strike sooner).
• The holder wants to exit the option position and convert it into a short stock position (or close a long stock position) immediately.

It’s less common than early call exercise around dividends, but it does happen—especially in deep ITM puts with minimal extrinsic value remaining.

Operational Walkthroughs: What Changes in Your Account

Below are step-by-step examples showing how positions, shares, and cash typically change. Assume 1 contract = 100 shares.

Example 1: You Sold a Covered Call and Get Assigned Early

Starting position:

• You own 100 shares of XYZ.
• You sold 1 XYZ call with strike $50.

Assignment happens (call holder exercises):

• Your short call position is removed (it is assigned).
• Your 100 shares are sold at $50 per share.
• Your account receives $5,000 cash from the share sale (minus fees, if any).

End state:

• Stock position: 0 shares of XYZ.
• Option position: no short call (it’s gone).
• Cash: +$5,000 (plus you already kept the premium you received when you sold the call).

Common surprise: “I wanted to keep the shares.” If you sold a call, assignment is a normal outcome. Around ex-dividend, it can happen earlier than expected.

Example 2: You Sold a Cash-Secured Put and Get Assigned

Starting position:

• You sold 1 XYZ put with strike $40.
• You set aside cash to buy 100 shares at $40 (cash-secured).

Assignment happens (put holder exercises):

• Your short put position is removed.
• You buy 100 shares at $40 per share.
• Your account cash decreases by $4,000 (minus/plus any fees; premium was received earlier).

End state:

• Stock position: +100 shares of XYZ.
• Option position: no short put (it’s gone).
• Cash: -$4,000 from the purchase (offset by the premium you collected when you sold the put).

Common surprise: “Why do I suddenly own shares?” Because selling a put is agreeing to buy shares if assigned. Assignment can occur at expiration or earlier (less common, but possible).

Example 3: You Bought a Call and It Is Automatically Exercised at Expiration

Starting position:

• You own 1 long XYZ call with strike $30.
• Expiration arrives and the option finishes ITM.

Automatic exercise:

• Your long call disappears (it is exercised).
• You buy 100 shares at $30.
• Your cash decreases by $3,000 (or you borrow on margin if you don’t have enough cash and your account allows it).

End state:

• Stock position: +100 shares.
• Option position: none.
• Cash/margin: reduced by $3,000 (or a margin debit appears).

Beginner risk: If you intended to close the option for profit but forgot, you may end up with shares and a cash/margin hit.

Example 4: You Sold a Call Without Shares (Naked) and Get Assigned

Starting position:

• You sold 1 XYZ call strike $60.
• You do not own XYZ shares.

Assignment happens:

• Your short call is removed.
• You must deliver 100 shares at $60. If you don’t have them, your account becomes short 100 shares (you sold shares you didn’t own).
• Your account receives $6,000 cash from the short sale proceeds, but you now have a short stock position with its own margin requirements and risk.

End state:

• Stock position: -100 shares (short).
• Option position: none.
• Cash: +$6,000 proceeds, but margin requirement increases and losses can grow if the stock rises.

Beginner risk: Unexpected short shares and a margin call if the account can’t support the position.

How to Reduce Surprises (Operational Checklist)

1) Monitor ITM Short Options as “Stock Positions Waiting to Happen”

• If you are short an ITM call: be prepared to sell shares (or become short shares if uncovered).
• If you are short an ITM put: be prepared to buy shares (cash outflow).

2) Watch the Ex-Dividend Calendar if You Sold Calls

• Know the ex-dividend date for any stock where you are short calls.
• As ex-dividend approaches, check whether your short call is ITM and whether it has little extrinsic value left.
• If you strongly want to avoid assignment, consider adjusting before the ex-dividend date (for example, closing or rolling the call), subject to your plan and costs.

3) Don’t Let Long ITM Options Expire by Accident

• If you want shares, exercise can be fine—but confirm you have the cash/margin capacity.
• If you don’t want shares, close the option before expiration rather than relying on “it’ll probably be fine.”

4) Know Your Broker’s Cutoffs and Policies

• Automatic exercise threshold (often $0.01 ITM, but verify).
• Deadlines for submitting “do not exercise” or exercise instructions.
• Whether your broker may close positions near expiration due to risk controls.

Troubleshooting: Common Beginner Shocks

Shock #1: “I Woke Up Owning 100 Shares I Didn’t Buy”

Likely cause: Your long call was automatically exercised, or your short put was assigned.

What to check:

• Look at your activity/history for an “exercise” (long option) or “assignment” (short option).
• Confirm the strike price and number of contracts.

Immediate actions:

• If you did not want the shares, decide whether to sell them (market risk now comes from the stock).
• If you intended to own shares, verify your cost basis reflects strike and premium effects as your broker reports them (reporting varies).

Shock #2: “My Cash Balance Is Negative”

Likely cause: A long call exercise or short put assignment required cash to buy shares, and you didn’t have enough settled cash. The account may show a margin debit or negative cash.

What to check:

• Was the account allowed to use margin?
• Did you buy 100 shares per contract at the strike?

Immediate actions:

• Deposit funds, sell shares, or reduce exposure to bring the account back within requirements.
• Review interest charges on margin debits if you keep the position.

Shock #3: “I’m Suddenly Short Shares”

Likely cause: You were assigned on a short call without owning shares (or your shares were not available/settled as expected).

What to check:

• Do you have a -100 share position?
• Is there a corresponding assignment record?

Immediate actions:

• If you don’t want to be short, buy shares to cover.
• Check margin requirements; short stock can require substantial margin and can be volatile.

Shock #4: “I Thought My Option Was OTM, But I Still Got Assigned”

Likely causes:

• After-hours price movement made the option effectively ITM for exercise decisions.
• The option was ITM by a small amount at the official cutoff.
• A holder chose to exercise even if it was only slightly beneficial (or due to their own constraints).

Immediate actions:

• Review the official closing price used for expiration.
• Assume that any option near the strike at expiration can produce unexpected outcomes; manage by closing earlier if you need certainty.

Shock #5: “Margin Call / Position Liquidation Notice”

Likely cause: Assignment created a stock position (long or short) that your account cannot support under margin rules.

What to check:

• New stock position size and direction (long vs. short).
• Account buying power and maintenance margin requirement.

Immediate actions:

• Reduce exposure quickly (sell long shares or buy to cover short shares) or add funds.
• Contact your broker if you need to understand deadlines; brokers can liquidate positions to meet requirements.

Quick Reference Table: Who Does What, and What You End Up With