What is Early Assignment Risk? (When Dividends Are Involved)
Options are rarely exercised early—except when dividends flip the math. Learn how to spot and avoid the dividend trap.
Quick Summary
Early Assignment occurs when an option holder exercises before expiration. It's rare—unless a dividend is coming. Call holders don't receive dividends; shareholders do. If the dividend exceeds the option's remaining time value, holders will exercise early to capture it—and you get assigned.
In options trading, we often say that "options are rarely exercised before expiration."
For the most part, this is true. It rarely makes sense for an option buyer to exercise early because they would throw away the Extrinsic Value (Time Value) remaining on the contract. Usually, it's more profitable for them to just sell the option back to the market.
This logic is why most options traders never experience early assignment. The math simply doesn't favor it.
But there is one major exception to this rule. A specific scenario where the math flips, and you—as the seller—are at high risk of waking up to a nasty surprise.
That exception is Dividend Risk.
The Definition: What is Early Assignment?
THE MECHANISM
Early Assignment occurs when the person holding the Long Option decides to exercise their right before the expiration date.
As the seller (Short Option), you have no control over this. If they push the button, you are randomly selected by the clearinghouse to fulfill your obligation immediately.
This almost exclusively happens with Short Call Options on stocks that pay a Dividend.
The Logic: Why Would Anyone Exercise Early?
To understand the risk, you have to think like the person who bought your Call option.
The Scenario
You own a Call Option on Coca-Cola (KO). The stock is trading at $62, and you hold the $60 Call.
The Problem
Call options do not receive dividends. Only shareholders do. You own the right to buy shares—you don't own the shares themselves.
The Catalyst
Coca-Cola is about to go "Ex-Dividend" tomorrow. If you own the shares by the end of today, you get a $0.50 dividend check. If you just own the option, you get nothing.
The Math That Triggers Exercise
If the dividend exceeds the remaining time value, exercise makes sense:
The Danger Zone: Who Gets Hurt?
Early assignment hurts different option sellers in different ways.
Your Position
You own 100 shares of KO and sold a Covered Call.
What Happens
You're assigned early. Your shares are called away (sold) the night before the Ex-Dividend date.
The Damage
You sold your shares for a profit (good), but you missed the dividend payment (bad). The person who bought your shares gets the check.
Your Position
You're trading a Credit Spread. You don't own the underlying stock.
What Happens
You're assigned on your Short Call. You wake up with a Short Stock position in your account.
The Kick in the Teeth
Because you're short stock on the Ex-Dividend date, YOU owe the dividend. $0.50 × 100 shares = $50.00 deducted from your account.
How to Spot Dividend Risk
You are only at risk if three conditions are true simultaneously:
- You are Short a Call Option
- The option is In-The-Money (ITM)
- An Ex-Dividend Date is approaching (usually tomorrow)
How to Protect Yourself
The solution is simple: Don't hold risky positions through the Ex-Dividend date.
Know when your stocks pay dividends. Most brokers show ex-dividend dates in the option chain or stock details. Plan your trades around these dates.
If you're short an ITM call, buy it back the day before the Ex-Dividend date. Or "Roll" it to a later expiration—adding more time value removes the exercise incentive.
Frequently Asked Questions
Summary
Early Assignment is a rare event—but "Dividend Risk" is a calculated certainty.
- Call holders don't get dividends: Only shareholders receive dividend payments.
- The math triggers exercise: When dividend > time value, early exercise is profitable.
- Covered call writers lose dividends: Shares get called away before the payout.
- Spread traders owe dividends: Short stock on ex-date means you pay the dividend.
- Prevention is simple: Close or roll ITM short calls before the ex-dividend date.
Market Makers are computers. They will not miss a free money opportunity. If your option offers them a mathematical arbitrage to capture a dividend, they will take it—and you will be the one footing the bill.
