Options Trading – Assignment

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Dec 05 2006
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How can I tell when I will be assigned?
You can never tell when you will be assigned. Once you sell an option (put or call), you have the potential for being assigned to fulfill your obligation to receive (and pay for) or deliver (and get paid for) shares of stock on any business day. In some circumstances, you may be assigned on a short option position while the underlying shares are halted for trading, or perhaps while they are the subjects of a buyout or takeover. To ensure fairness in the distribution of equity and index option assignments, The Options Clearing Corporation (OCC) utilizes a random procedure to assign exercise notices to the accounts maintained with OCC by each Clearing Member.

When will notice of assignment on a short contract be received?
Generally, brokerage firms will deliver notice of assignment on short option positions on the business day following an option owner’s exercise of a similar option. Check with your brokerage firm about its procedures and timing for such notification.

Will you be assigned on an equity option contract that expires exactly at-the-money?
Some professional traders will exercise an expiring call or put that is exactly at-the-money, therefore assignment on such a short contract is possible.

Why my option which is 10 cents in-the-money got assigned at the market close on expiration Friday ?
While each firm may have their own thresholds, the Option Clearing Corporation’s auto exercise threshold as of September 2006 is 5 cents (.05) in the customers account (The automatic exercise threshold in firms and market makers accounts is 5 cents). Customers and Brokers should check with their firm’s Operations Department to determine their company’s policies regarding exercise thresholds.

What happens to my short option if I am never assigned?
After its expiration date a call or put will cease to exist. If you have written an option and are not assigned an exercise notice before it expires, you no longer have any of the obligations inherent in that contract and you keep the premium you received for it, less any commissions and fees you incurred at its initial sale. You are free to close out a short call or put before expiration by purchasing a like contract in the marketplace.

Some guidelines when you might be more likely to be assigned on a short-option position:

  • Only about 17% of options end up being exercised; the percentage hasn’t varied much over the years. That does not mean that you can only be assigned on 17% of your short option, however. It means that, in general, option exercises are not that common.
  • The majority of option exercises (and the corresponding assignments) take place as the option gets closer to expiration.
  • Generally, a put which goes in-the-money is more likely to be exercised than a call which goes in-the-money. Why? Think about the result of an exercise. An investor who exercises a put uses it to sell shares and receive cash. A person exercising a call option uses it to buy shares and must pay cash. People are more likely to exercise options if it means they can receive cash sooner.

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So I am interested in the fact that only 17% of options are exercised and that this figure has remained largely constant. That a trader is more likely to exercise a Put rather than a Call does make sense.

So I guess this gives a prime example of psychology at play in the trading game and highlights why traders should perhaps focus their attentions more on this element of their trading than simple trading strategies to improve performance?

I only just came across this but its an interesting article. It’s interesting to note that most options are exercised close to the expiry… I guess this is obvious but I wonder how many are closed at a loss? It is probably because traders hold positions for too long, holding out for the best return.

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