Options Assignment

How can I tell when I will be assigned?

You can never tell when you will be assigned. Once you sell an American-style option (put or call), you have the potential for assignment to fulfill your obligation to receive (and pay for) or deliver (and are 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 clearing member accounts maintained with OCC. The assigned firm must then use an exchange-approved method (usually a random process or the first-in, first-out method) to allocate notices to its accounts that are short the options.

Some generalizations might help you understand likelihood of assignment on a short-option position:

  • Option holders only exercise about 7% of options. The percentage hasn't varied much over the years. That does not mean that you can only be assigned on 7% of your short option. It means that, in general, option exercises are not that common.
  • The majority of option exercises (and the corresponding assignments) occurs as the option gets closer to expiration. 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, an investor is more likely to exercise a put that goes in-the-money than a call that 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. Option holders 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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Could I be assigned if my covered calls are in-the-money?

The option holder has the right to exercise their options position prior to expiration regardless of whether the options are in- or out-of-the-money. You can be assigned if any market participant holding calls of the same series as your short position submits an exercise notice to their brokerage firm. The firm then submits an exercise notice to OCC (or if the brokerage firm is not an OCC clearing member, it submits the notice to a firm that is an OCC clearing member, and that member submits the notice to OCC). OCC randomly assigns exercise notices to clearing members whose accounts have short positions of the same series. The clearing member then assigns the exercise notice to one of its short positions using a fair assignment method, though not necessarily random. 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. 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 no possibility of assignment.

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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 investor tenders an exercise notice, OCC randomly selects a member brokerage firm carrying a short position in that series for assignment. The brokerage firm may then assign the notice randomly or on a first-in, first-out basis. Regardless of what method the brokerage firm applies equity option writers are subject to the risk that some or all of their short options may be assigned each day.

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Are options automatically assigned when they are in-the-money at expiration? Is there a way that I can avoid assignment?

OCC encourages all investors to inform their brokerage firm of their exercise intentions for their long options at expiration. While each firm may have their own thresholds, OCC employs an administrative procedure where options that are $.01 in-the-money are exercised unless contrary instructions are provided. 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 is 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? 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 $.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 assignment.

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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 assignment on that short call?

The most obvious and straightforward 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 a less-than-ideal gain, it assures the investor that their stock will not be called away. Some alternatives to assignment 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.

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

You will want to first check with your broker to ensure that an assignment has not already occurred.

Because OCC processes closing buy transactions before exercises, there is no possibility of being assigned on positions that were closed during that day's trading hours.

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When I sell an option to open, is my only chance of assignment (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, OCC allocates assignments randomly. Anyone short that particular option is at risk of assignment when an option holder decides to exercise. Third, assuming the other side of your trade was an opening purchase, they may sell to close at any time but since you are still short, you are at risk of assignment.

As long as you keep a short option position open, you are at risk of assignment. 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, OCC exercises all equity options that are in-the-money by $.01 or more unless the option holder instructs their broker not to exercise or the stock has been removed from OCC’s exercise-by-exception processing.

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The exchanges recently halted trading on a stock where I’m short puts. 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, regardless 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 affect the ability of put or call holders to exercise (and a writer subsequently to 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 OCC’s exercise-by-exception processing (automatic exercise). For more information, read OCC’s Review of Trading Halt Processing in Infomemo #30049.

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