Options Assignment

I was assigned on my March 40 put option when the stock value went below $38, even though it wasn't expiration. On another stock, I had a covered write position where I was short a 70 call which went in-the-money by $7, and the call wasn't assigned until expiration day. How can I tell when I will be assigned?

The short answer is that you can never tell when you will be assigned. Once you sell an option (put or call), you have the potential for being assigned to fulfill your obligation to receive (and pay for) or deliver (and get paid for) shares of stock on any business day. In some circumstances, you may be assigned on a short option position while the underlying shares are halted for trading, or perhaps while they are the subjects of a buyout or takeover. To ensure fairness in the distribution of equity and index option assignments, OCC utilizes a random procedure to assign exercise notices to the accounts maintained with OCC by each Clearing Member. The assigned firm must then use an exchange approved method (usually a random process or the "first-in, first-out" method) to allocate those notices to accounts which are short the options.

Having said that, there are some generalizations which might help you understand when you might be more likely to be assigned on a short-option position.

  • Only about 12% of options end up being exercised; the percentage hasn't varied much over the years. That does not mean that you can only be assigned on 12% of your short option, however. It means that, in general, option exercises are not that common.
  • The majority of option exercises (and the corresponding assignments) take place as the option gets closer to expiration. Without getting into the math too much, it usually doesn't make sense to exercise an option, which has any time premium over intrinsic value. For most options, that doesn't occur until close to expiration.
  • In general terms, a put which goes in-the-money is more likely to be exercised than a call which goes in-the-money. Why? Think about the result of an exercise. An investor who exercises a put uses it to sell shares and receive cash. A person exercising a call option uses it to buy shares and must pay cash. People are more likely to exercise options if it means they can receive cash sooner. The opposite is true for calls, where exercise means you have to pay cash sooner.

The bottom line is that you really don't have any sure-fire way to predict when you will be assigned on a short option position; it can happen any day the stock market is open for trading.

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How could I be assigned if my covered calls are in-the-money?

The option holder has the right to exercise his or her options position prior to expiration regardless of whether the options are in-the-money or out-of-the-money. You can be assigned if an investor or market professional holding calls of the same series as your short position submits an exercise notice to his or her brokerage firms, which in turn, submitted an exercise notice to OCC (or if the brokerage firm is not an OCC Clearing Member, then it would submit the notice to a firm that is an OCC Clearing Member, and that Member would then submit the notice to OCC). OCC randomly assigns exercise notices to Clearing Members in whose accounts have short positions of the same series. The Clearing Member then assigns the exercise to one of its short positions using a fair assignment method, though not necessarily random. You should ask your brokerage firm how it assigns exercise notices to its customers.

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If I am short a call option (on a covered write) and I buy back my short call, is it possible for me to be assigned (And the stock position to be called away) that night?

No, it is not possible. The assignments are determined based on net positions after the close of the market each day. Therefore, if you bought back your short call, you no longer have a short position at the end of the day, and therefore no possibility of being assigned.

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I sold short 10 options contracts recently. Unfortunately, I was assigned early on each contract, one at a time. Couldn't all the contracts have been assigned at once?

The exercise of an option prior to expiration is solely at the discretion of the buyer. The option buyer can also decide how many contracts in a multi-contract position to exercise at a given time. Once an exercise notice is tendered, OCC randomly selects for assignment a member brokerage firm carrying a short position in that series. The brokerage firm may, in turn, assign the notice randomly, or on a "first-in, first-out" basis. Regardless of what method is applied by the brokerage firm, equity options writers are subject to the risk each day that some or all of their short options may be assigned.

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What time each day does the clearing member receive information from OCC regarding assignments?

OCC's clearing members can submit exercise notices, on a daily basis, up to 6:00 p.m. CT. In general, each clearing member establishes an earlier deadline for its customers. (There is a different set of procedures for expiring options.) As part of nightly processing, OCC randomly assigns its clearing members based on the day’s exercises and this processing is generally completed by 12:00 a.m. CT. OCC transmits the assignments to clearing members and as part of the member's nightly processing, the clearing firms then allocate the assignments to their customers on either a random basis or a first-in, first-out basis. Investors should check with their brokerage firm for their assignment process and their cut-off times for submission of exercise and do-not exercise notices.

We understand the exchanges' rules indicate that brokerage firms should notify customers in a timely manner. You and your broker should determine what constitutes timely manner as part of your user agreement.

In June 2013, the SEC approved a rule change that moved the processing of standard monthly expiring options from Saturday to Friday. This was merely a back-office change, but due to the large amount of processing for the monthly expiration, data may be transmitted later than usual on that Friday.

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I recently wrote a call option. At the market close on expiration Friday, the option was 41 cents (.41) in-the-money. My broker told me that calls are "automatically" assigned when they are a certain amount in the money at expiration. Is there is a way that I can avoid being assigned?

While each firm may have their own thresholds, OCC's auto exercise threshold is 1 cent (.01) in the customers account. (The automatic exercise threshold in firms and market makers accounts is 1 cent (.01).) Customers and Brokers should check with their firm's Operations Department to determine their company's policies regarding exercise thresholds. An option holder has the right to exercise their option regardless of the price of the underlying security. It might be a good practice for all option holders to express their exercise - or non-exercise - instructions to their broker. Is there a magic number that ensures that option writers will not be assigned? The answer would be 'NO'. Although unlikely, an investor may choose to exercise a slightly out of the money option or choose not to exercise an option that is in the money by greater than 1 cent (.01).

Some investors use the saying, "when in doubt, close them out". This means that if they buy back any short contracts they are no longer at risk of being assigned.

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I wrote a slightly out-of-the-money covered call. The call has since moved in-the-money. Is there any way to avoid option assignment?

The most obvious and straight forward action would be to close out the position by buying the call back. While this may not be attractive and may result in a loss, or less than hoped for gain, it will assure that your stock will not be called away. Some alternatives to being assigned are to "roll out and up". To roll out and up involves buying back the current option and selling a higher strike in a further out month. This may allow an investor to gain some additional time premium and added stock appreciation. You will want to consult your broker for any advice on this strategy.

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If I "buy to close" a short position, how can I be sure I will not be assigned?

You will first need to check with your broker to ensure that an assignment has not already occurred. If not, here is how processing occurs:

At the end of the day, OCC accumulates all option exercises. Prior to processing exercises, OCC's clearing system accumulates all post-trade transactions and matched-trades together and applies them to Clearing Members' positions in the following sequence:

  1. All Opening Buys
  2. All Opening Sells
  3. All Closing Buys
  4. Exercises
  5. All Closing Sells
  6. Assignments

Because closing buys are processed before exercises, there is no possibility of assignment on positions that were closed via closing buy orders during that day's trading hours.

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When I sell an option to open, is my only chance of being assigned (and being required to fulfill my obligations as the option writer) when the person or entity that bought from me decides to exercise?

No. There are several reasons why this is untrue. First, the buy side of your opening sale could have been a closing purchase by someone who was already short the option. Second, as assignments are handed out randomly, anyone who is short that particular option is at risk of being assigned when an option holder exercises. Third, assuming the other side of your trade was an opening purchase, they may sell to close anytime but since you are still short, you are at risk of being assigned. As long as you keep a short option position open, you are at risk of being assigned. Generally speaking, assignment risk increases as the option becomes deeper in the money and as expiration approaches (The option trades with less time premium). Assignment risk also increases just before the ex-dividend date for short calls and just after the ex-dividend date for short puts.

At expiration all equity options that are in-the-money by a penny or more are exercised unless the option holder instructs their broker not to exercise.

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I’m short puts on a stock for which trading was recently halted. Am I still obligated to purchase the security if assigned?

Yes, put writers who have open short positions have an obligation to buy the underlying at the strike price - irrespective of whether the stock is trading. When a stock exchange halts trading in a stock, the options likewise won't trade. This lack of trading typically does not impact the ability of put or call holders to exercise (and a writer to subsequently be assigned) – unless the put holder's firm imposes restrictions on those who do not have long stock. Although option writers still carry the obligations associated with their short position, option holders may have to enter explicit instructions with their firm to either exercise or not exercise any expiring option. Depending on when the trading halt occurred, the options may be removed from "ex by ex" processing (Automatic exercise). But again, writers may still be assigned. Click here to learn more about trading halts.

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