Exercise vs Assignment: What Happens When Options Are Exercised
Understand what happens when options are exercised and the assignment process for option sellers.
Exercise and Assignment
are two sides of the same transaction. Exercise is when an option buyer uses their right to buy (call) or sell (put) stock. Assignment is when an option seller is obligated to fulfill that transaction.
Most options are NOT exercised—they're closed by trading. But understanding exercise/assignment is crucial for managing risk.
Exercise = buyer uses their right (voluntary). Assignment = seller fulfills obligation (involuntary). Most traders close before expiration. Early assignment can happen on American options. Watch ITM short options near expiration or dividends.
Exercise (Buyer's Action)
When you exercise an option, you're using your right to buy or sell stock at the strike price.
Exercise a call: You buy 100 shares at the strike price
Exercise a put: You sell 100 shares at the strike price
Exercise is voluntary—you choose whether to do it. But ITM options auto-exercise at expiration (unless you instruct otherwise).
Assignment (Seller's Obligation)
When you're assigned, you must fulfill the other side of the transaction.
Assigned on short call: You must sell 100 shares at strike price
Assigned on short put: You must buy 100 shares at strike price
Assignment is involuntary—you don't choose when it happens. The Options Clearing Corporation (OCC) randomly selects sellers to assign.
When Does Early Assignment Happen?
- Deep ITM options: Little extrinsic value left to lose
- Before dividends: Call holders may exercise to capture dividend
- Near expiration: ITM options with minimal time value
Key Takeaways
- Exercise = buyer's choice to buy/sell stock
- Assignment = seller's obligation when exercised against
- Most traders close positions, don't exercise
- Watch ITM short options for early assignment risk
- Have capital ready if you might be assigned
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