Assignment

Assignment refers to the process in options trading where the seller of an options contract is required to fulfill the terms of the contract. For call options, this means delivering the underlying asset (e.g., stock) to the buyer at the strike price. For put options, it means buying the underlying asset from the buyer at the strike price. The assignment typically happens when the option is exercised by the buyer.

Key Features:

Obligation: Assignment creates an obligation for the seller (also known as the writer) to either deliver the underlying asset (for calls) or purchase the underlying asset (for puts) at the agreed-upon strike price.

Call Options: When you are assigned on a call option, you must sell the underlying asset at the strike price, regardless of its current market price.

Put Options: When you are assigned on a put option, you must buy the underlying asset at the strike price, regardless of its current market price.

Assignment Timing: Assignment occurs when the buyer of the option exercises their right to buy (for calls) or sell (for puts) the underlying asset before or on the expiration date of the option.

Automatic Process: Assignment happens automatically once the option is exercised; the seller is not required to take any action beyond fulfilling the terms of the contract.

Importance of Assignment:

Obligation for Sellers: Sellers of options (writers) must understand the potential for assignment and be prepared to fulfill the contract if exercised.

Profit/Loss Determination: Whether assigned or not, the outcome of an options trade—whether the option is exercised or expires worthless—determines the profit or loss for the seller.

Risk Management: Sellers must manage the risk of assignment, especially if they don’t have the necessary underlying asset in their portfolio (in the case of uncovered options positions).

Stock Position Impact: For covered call writers, assignment means selling the underlying stock, which could result in missed further upside if the stock rises beyond the strike price.

Top 10 FAQs:

What does it mean to be assigned on an option?
Being assigned means you are required to fulfill the terms of the options contract. For a call option, you must sell the underlying stock at the strike price. For a put option, you must buy the underlying stock at the strike price.

When does assignment occur?
Assignment occurs when the holder of an option exercises their right to buy (call) or sell (put) the underlying asset, typically on or before the expiration date.

Can I prevent being assigned?
No, if you sell an option and the holder decides to exercise it, you will be assigned automatically. However, you can close the position by buying back the option before expiration to avoid assignment.

What happens when I am assigned on a covered call?
If you are assigned on a covered call, you must sell the underlying asset at the strike price. This means you will no longer own the stock, but you will have realized a gain from the stock price appreciation (up to the strike price) plus the premium received from selling the call.

What happens when I am assigned on a put option?
If you are assigned on a put option, you must buy the underlying asset at the strike price. This could result in buying the asset at a price higher than the market price, resulting in a loss if the stock is significantly below the strike price.

Can I choose when I get assigned?
No, assignment occurs when the option holder exercises their right, and it happens automatically. Sellers of options must be ready for assignment at any time before the expiration.

What is the difference between being assigned and exercising an option?
Exercising an option is the action taken by the holder (buyer) to use their right to buy (for calls) or sell (for puts) the underlying asset. Assignment, on the other hand, is the obligation of the option seller to fulfill the contract once the option is exercised by the holder.

Can assignment happen if the option is out-of-the-money?
No, assignment usually only occurs if the option is in-the-money or at-the-money, meaning the option holder has the potential to benefit from exercising the option.

Do I have to sell the underlying asset if I am assigned on a call?
Yes, if assigned on a call option, you must sell the underlying asset at the strike price, regardless of the current market price of the asset.

Example:

You sell a covered call option on 100 shares of XYZ stock with a strike price of $50. If the stock price rises to $55, the buyer of the call option exercises the option and you are assigned. You are obligated to sell your 100 shares at $50, regardless of the current market price of $55. In this case, you earn the $50 per share from the sale, plus the premium you received for selling the option.