Early Assignment Risk Guide

Understanding Early Assignment Risk

Early assignment is the nightmare scenario that keeps new options traders awake at night: you sell an option, and suddenly—before expiration—you're notified that someone exercised it. You now own (or are short) 100 shares you didn't plan for, and it's often at the worst possible moment.

Here's the reality: early assignment is actually quite rare (less than 5% of options are exercised early), but when it happens, it can disrupt your trading plan and create unexpected risk. Understanding when and why it happens allows you to avoid it almost entirely.

Key concept: Only American-style options (most US equity options) can be exercised early. European-style options (SPX, NDX, RUT) can only be exercised at expiration, eliminating early assignment risk entirely.

When Does Early Assignment Happen?

Early assignment occurs in three main scenarios:

1. Dividend Capture (The #1 Reason)

This is BY FAR the most common cause of early assignment. Here's why it happens:

Imagine you own an Apple call option, and Apple goes ex-dividend tomorrow for $0.25 per share. If your call is in-the-money:

• You can exercise the call today
• Own the stock before ex-dividend
• Receive the $0.25 dividend ($25 for 100 shares)

For deep ITM calls with little time value, exercising to capture the dividend makes perfect sense. The call holder gets $25 in dividend, loses maybe $10-15 in remaining time value—net gain of $10-15.

Critical rule: If you're short calls and the stock goes ex-dividend within 5 days, expect early assignment on ITM calls. Close or roll the position 1-2 days BEFORE ex-dividend to avoid this.

2. Deep ITM Options Near Expiration

When an option is more than $5-10 ITM with less than 7 days to expiration and almost no time value remaining, the holder may exercise early rather than risk after-hours moves or just to free up capital.

Example: You're short the 100 put, stock crashes to $85 with 3 days to expiration. The put is $15 ITM with maybe $0.05 of time value. The holder exercises to realize the $15 profit immediately rather than wait 3 days and risk a bounce.

3. Interest Rate Arbitrage (Rare)

When interest rates are high, holding deep ITM calls ties up capital that could earn interest elsewhere. In rare cases, institutional traders will exercise deep ITM calls early to free up capital for higher-yielding opportunities. This is uncommon and typically only happens in high interest rate environments (>5%).

How Are Early Assignments Allocated?

Many traders worry: "I have 10 short calls, if one gets exercised, which one will I be assigned on?" Here's how it works:

The Options Clearing Corporation (OCC) allocates assignments to brokers, and brokers then allocate to individual accounts. Most brokers use one of these methods:

• Random: Computer randomly selects accounts with that short position
• First-in, first-out: Oldest short positions assigned first
• Pro-rata: All accounts assigned proportionally

Important: You can't predict or control being selected. If you're short ITM options near ex-dividend, assume you WILL be assigned and act accordingly.

How to Avoid Early Assignment

Early assignment is almost entirely avoidable if you follow these rules:

1. Check Ex-Dividend Dates Religiously

This cannot be overstated. If you sell covered calls or naked calls, you MUST track dividend dates.

Action items:

• Set calendar reminders for ex-dividend dates on all holdings
• Close or roll ITM short calls 1-2 days before ex-dividend
• If assigned, you're short stock and liable for the dividend payment (ouch)

2. Close Deep ITM Positions

If your short option goes more than $5 ITM with less than 7 days to expiration, close it. The risk of early assignment exceeds any remaining profit potential.

3. Use European-Style Options

SPX, NDX, and RUT options cannot be exercised early. If you trade these indices instead of SPY, QQQ, or IWM, you eliminate early assignment risk entirely. Many professional traders prefer SPX for this reason alone.

4. Monitor Positions Through Earnings

Companies sometimes announce special dividends during earnings calls. If you're short calls through earnings, check immediately after the announcement for any dividend surprises that could trigger early assignment.

5. Close Positions 7-10 Days Before Expiration

This is the nuclear option: close everything 7-10 days out. This eliminates assignment risk and expiration week gamma risk. Many professionals follow this rule religiously.

What to Do If You're Assigned Early

Despite best efforts, sometimes you'll be assigned. Here's your action plan:

Assigned on Short Calls

You're now short 100 shares:

• Covered call: Your shares are called away. Expected outcome, keep premium, move on.
• Naked call: You're short stock! Buy back immediately at market open or face unlimited risk.
• Spread: Exercise your long call to cover the short stock, or close the stock position and manage the spread.

Assigned on Short Puts

You now own 100 shares:

• Cash-secured put: Keep the stock or sell it immediately
• Wheel strategy: Perfect! Start selling covered calls against your new shares
• Spread: You're now long stock with a long put still open—effectively a synthetic long call. Close or manage accordingly.

The Dividend Liability Trap

If assigned on a short call before ex-dividend:

• You're short stock on ex-dividend date
• You OWE the dividend to whoever bought your shares
• This payment comes out of your account automatically

Example: Short 5 AAPL calls, assigned before $0.25 dividend, you're short 500 shares. You owe $125 in dividends, plus you're exposed to overnight gap risk on 500 shares. This can turn a small winner into a big loser fast.

Which Strategies Are Most At Risk?

High Risk

• Covered calls on dividend stocks: Highest risk. ITM calls WILL be assigned before ex-dividend.
• Short ITM calls (naked): Terrible risk/reward near ex-dividend.
• Long calendars with short front-month ITM: Front month can be assigned, leaving you with just the back month long.

Medium Risk

• Credit spreads deep ITM: Short leg can be assigned while long leg remains.
• Iron condors near expiration: Legs going deep ITM are assignment candidates.
• Short puts on crashing stocks: Risk of early exercise if stock gaps down significantly.

Low Risk

• Short OTM options: Will never be assigned (no intrinsic value to capture).
• Debit spreads: You're long options, can't be assigned.
• European options (SPX, NDX): Zero early assignment risk.

Key Takeaways