What is Option Assignment?
The other side of exercising: what happens when you're the option seller and the contract comes due.
Quick Summary
Assignment is the notification that an option seller receives when a buyer exercises their contract. If you sold a call, you must sell shares at the strike. If you sold a put, you must buy shares at the strike. Unlike buyers who have rights, sellers have obligations they cannot refuse.
In our previous post, we discussed exercising—the power the buyer of an option has to demand shares of stock.
But for every buyer, there is a seller. And if the buyer decides to exercise their right, the seller must face the consequences. This consequence is called Assignment.
For option sellers (also called "writers"), assignment is not a choice—it is an obligation. It's the moment when the contract you sold comes due, and you are forced to fulfill your end of the deal.
The Definition: What is Assignment?
Assignment is the formal notification that an option seller receives when the option buyer exercises their contract.
If You Sold a Call
You are assigned the obligation to sell 100 shares at the strike price.
If You Sold a Put
You are assigned the obligation to buy 100 shares at the strike price.
Option Buyer
Has the RIGHT
Can choose
Option Seller
Has the OBLIGATION
Cannot refuse
How Does the Assignment Process Work?
Option trading is anonymous. You're not paired with a specific person on the other side of the trade—you're trading against the market clearinghouse (the OCC). Here's what happens behind the scenes:
1. The Trigger
A random option holder somewhere in the world decides to exercise their contract.
2. The Lottery
The Options Clearing Corporation (OCC) randomly selects a brokerage firm holding short positions in that option series.
3. The Notification
Your broker receives the notice and randomly selects you from their pool of clients who sold that specific contract.
4. The Settlement
By the next morning, shares (or cash) are moved in or out of your account. The deal is done.
The Two Scenarios of Assignment
The impact of assignment depends entirely on whether you sold a Call or a Put.
Assignment on a Short Call
You sold a call (betting the stock would stay below the strike).
Scenario: The stock rose above your strike price.
Consequence: You must sell 100 shares at the strike price.
If you own the shares (Covered Call):
Your shares are "called away." You keep the cash from the sale, but lose the shares and any future upside.
If you don't own shares (Naked Call):
You become "Short Stock"—forced to borrow shares to deliver. Extremely risky.
Assignment on a Short Put
You sold a put (betting the stock would stay above the strike).
Scenario: The stock fell below your strike price.
Consequence: You must buy 100 shares at the strike price.
The Risk:
You pay the strike price regardless of current market value. If you sold a $100 put and the stock is at $80, you still pay $10,000 for shares worth only $8,000.
Example: Short Put Assignment Loss
When Does Assignment Happen?
Assignment can happen at any time with American-style options, but it's most common during two specific windows:
Expiration Day
The Most Common
The vast majority of assignments happen on expiration day. If your short option is In-The-Money by even $0.01 at market close, expect to be assigned.
Early Assignment
The Surprise
Can happen before expiration, especially: before dividend payments (short calls) or when options are deep ITM (short puts). Rare but possible.
Dividend Risk for Short Calls
If you sold a call on a stock that pays dividends, the buyer might exercise early to capture the dividend payment. Only shareholders of record receive dividends—option holders do not. Watch the ex-dividend date carefully.
How to Avoid Being Assigned
If you're selling options to generate income but don't want to actually buy or sell the stock, you need to be proactive:
Close the Position Early
The only 100% guarantee against assignment is to buy back the option you sold. This is called "Buy to Close." Once the position is closed, you have no obligation.
Avoid "Pin Risk"
If the stock is hovering exactly at your strike price on expiration Friday, close the trade. The stock could move against you in after-hours trading, leading to a surprise weekend assignment.
The Practical Approach
Most experienced option sellers set a profit target (e.g., 50% of premium collected) and close positions once that target is reached. This locks in profits AND eliminates assignment risk. Don't get greedy holding for the last few dollars of premium.
Frequently Asked Questions
Summary
Assignment is the mechanism that keeps the options market honest. It ensures that for every "winner" who exercises a contract, there is a counterparty fulfilling the agreement.
For experienced traders, assignment isn't necessarily a bad thing—it's often part of a deliberate income strategy. However, for the unprepared, waking up to find you suddenly own (or owe) thousands of dollars worth of stock can be a sobering experience.
The key takeaway: If you sell options, always know your obligations and have a plan for managing assignment risk before it happens.
Continue Learning
- What is Options Trading? Complete Beginner's Guide
- What is a Call Option? (Buying the Right to Buy)
- What is a Put Option? (Profiting from the Drop)
- What is the Strike Price? Complete Guide
- What is an Option Premium? Understanding the Price
- What is an Expiration Date? Why Timing Matters
- What is Exercising an Option? When to Exercise vs Sell
