Options Assignment Explained

Assignment is one of the most important mechanics in options trading, and one of the most misunderstood by beginners. If you sell options, assignment is the obligation you take on. Understanding exactly how it works, when it happens, and what to do about it is essential before you sell your first option.

What assignment is

Assignment occurs when the buyer of an option exercises their right, and you, as the seller of that option, are required to fulfill the contract. Assignment is the seller's side of exercise. When a long holder exercises, a short holder somewhere gets assigned.

What assignment requires depends on the type of option you sold:

• If you sold a call and are assigned: you must sell 100 shares at the strike price.
• If you sold a put and are assigned: you must buy 100 shares at the strike price.

When assignment happens

There are two scenarios where assignment occurs:

Assignment at expiration (most common):

When an option you sold expires in the money, it is automatically exercised by the buyer, and you are assigned. The Options Clearing Corporation automatically exercises any option that is in the money by at least $0.01 at expiration. So if your short option finishes in the money, expect to be assigned.

Early assignment (less common):

American-style options can be exercised any time before expiration, which means you can be assigned early. This is less common but happens in specific situations, most often when a short call is deep in the money right before a dividend, or when a short option has almost no time value remaining.

A simple example

You sell a cash-secured put on AAPL with a $180 strike and collect $300 in premium. You hold $18,000 in cash to back it.

At expiration, AAPL is trading at $175, below your strike. Your put is in the money, so you are assigned. You must buy 100 shares at $180, using your $18,000 in cash. You now own 100 AAPL shares.

Your effective cost basis is $180 minus the $3.00 premium you collected, or $177 per share. Even though AAPL is trading at $175, your break-even is $177 because of the premium.

Assignment is not always bad

For beginners, assignment can sound alarming, but in many strategies it is a planned, expected part of the process.

• Cash-secured puts: if you sold a put on a stock you wanted to own, assignment simply means you bought the stock at the price you chose, with a discount from the premium. This is the intended outcome.
• Covered calls: if you sold a call against shares you own and get assigned, you simply sell your shares at the strike price, keeping the premium and any gain up to the strike. Also the intended outcome.
• The wheel strategy is built entirely around planned assignment, cycling between assigned shares and premium collection.

Assignment only becomes a problem when it is unexpected or when it forces you into a position you did not want, such as being assigned on a naked call and having to deliver shares you do not own.

What to do if you get assigned

If you are assigned on a cash-secured put: you now own 100 shares at the strike price. If you are happy to own the stock (as you should be if you selected it correctly), you can hold the shares or begin selling covered calls against them (starting the wheel).

If you are assigned on a covered call: your shares are sold at the strike price. You keep the premium and any gain up to the strike. You are back to cash and can sell another put or buy shares again.

If you are assigned on a naked short option: this is the risky scenario. On a naked call, you must deliver 100 shares you do not own, meaning your broker buys them at the current market price, potentially at a loss. On a naked put without sufficient cash, you may face a margin call. This is why naked options are for experienced traders only.

How to avoid unwanted assignment

If you do not want to be assigned, the simplest rule is to close short options before expiration when they are in the money or close to your strike.

• Close short options that are in the money before the market closes on expiration day
• Watch for ex-dividend dates on short calls, which can trigger early assignment
• Do not hold short options through expiration when the stock is within 1 to 2% of your strike (pin risk)

The small cost to close an option before expiration is almost always worth the certainty of avoiding an unwanted assignment.

Related terms: Exercise, cash-secured put, covered call, the wheel, pin risk, early assignment, expiration date

Try it on Stryke: Monitor your short positions and their distance from the strike price as expiration approaches in the Portfolio tracker.