Assignment
Assignment is the process by which the seller (writer) of an options contract is obligated to fulfill the terms of the contract — either delivering 100 shares (call assignment) or purchasing 100 shares (put assignment) — when the buyer exercises their option.
Assignment is the other side of the exercise decision. When an options buyer chooses to exercise their American-style contract, the Options Clearing Corporation (OCC) randomly assigns that exercise notice to one of the accounts that holds a short position in the same contract series. The assigned seller has no choice in the matter — they must fulfill the contractual obligation immediately, typically settled overnight by T+1.
For a short call assignment, the seller must deliver 100 shares at the strike price. If the seller holds the shares (as in a covered call), the shares are simply sold at the strike and proceeds are deposited. If the seller does not hold the shares — a naked call — they must either purchase shares in the open market at the current (presumably higher) price and deliver them at the lower strike price, generating an immediate loss. This is why naked call writing carries substantial risk.
For a short put assignment, the seller is required to purchase 100 shares at the strike price. If the stock has declined significantly below the strike, the assigned seller is immediately underwater — they own shares worth less than the purchase price mandated by the contract. For cash-secured put writers, this outcome is anticipated and the cash to fund the purchase has been set aside in advance. The effective cost basis is the strike price minus the premium originally received.
Early assignment — exercise before expiration — is possible with American-style options and most commonly occurs in two scenarios. First, a deep-in-the-money put may be exercised early if the time value remaining is less than the interest that could be earned by having the cash proceeds sooner. Second, a call option on a dividend-paying stock may be exercised the day before the ex-dividend date to capture the dividend, provided the time value of the call is less than the dividend amount.
Traders who sell short-term options into earnings, dividends, or expiration should be especially aware of assignment risk. Monitoring positions around these dates, particularly for short options that are in the money, is essential for avoiding unwanted share ownership or short-sale exposure.