Exercise and assignment

Exercise and assignment describe the two sides of what happens when an option holder uses their contractual right. Exercise is the action taken by the option holder, the buyer, who chooses to use the option, buying the underlying stock at the strike price if it is a call, or selling the underlying stock at the strike price if it is a put. Assignment is what happens on the other side of that same trade, the process by which the option seller, the writer, is notified that they must now fulfill the obligation they took on when they sold the contract.

An option holder is generally free to exercise an American-style option at any point before expiration, though most choose to sell the option itself rather than exercise it, since selling usually captures both the intrinsic value and any remaining time value, while exercising only captures the intrinsic value. When exercise does happen, a clearing organization randomly assigns the exercise notice to one of the brokers holding a matching short position, and that broker in turn assigns it to one of its clients who is short the option, typically using a random method or the order in which positions were opened, depending on the broker.

Assignment can happen unexpectedly, particularly for a covered call seller whose stock rallies well above the strike price, or around a dividend payment when it can become economically attractive for a call holder to exercise early to capture the dividend. An option seller who is assigned must deliver or accept the shares at the strike price regardless of where the stock is trading at that moment, which is why anyone selling options, particularly uncovered ones, needs to understand that assignment can occur at any time the option is in the money, not only at expiration.