Options Assignment and Expiration: What Happens and How to Prepare

Every option eventually expires, is closed, or is exercised. Many traders close positions before expiration and never deal with exercise. But if you hold through expiration, or hold short options, you need to know how assignment works, because surprises here can be expensive.

Exercise and assignment

• Exercise: the option holder uses the right to buy (call) or sell (put) the underlying at the strike.
• Assignment: the option seller is chosen to fulfil that obligation. In US listed options, assignments are allocated through the Options Clearing Corporation and then by brokers to their customers.

At expiration

In the US, equity options that are in the money by a small amount (commonly $0.01 or more) at expiration are generally exercised automatically unless the holder instructs otherwise. Check your broker's rules.

• Long call in the money: you buy 100 shares at the strike, which requires the cash or margin.
• Long put in the money: you sell 100 shares at the strike, which can create a short position if you do not own them.
• Short call in the money: you sell 100 shares, possibly short.
• Short put in the money: you buy 100 shares.

Out-of-the-money options expire worthless.

Early assignment

American-style options, including most US single-stock options, can be exercised any time before expiration. Early exercise is uncommon because it gives up the option's remaining time value, but it happens, most often:

• For calls, just before an ex-dividend date, when the dividend exceeds the remaining time value of the call.
• For deep in-the-money puts, when time value is very small.

Most index options are European-style and can only be exercised at expiration. Many are cash-settled.

Pin risk

If the underlying closes very near your short strike at expiration, you may not know whether you will be assigned. After-hours moves can change whether the holder exercises. Closing positions near the strike before expiration avoids this uncertainty.

Spreads and assignment

In a spread, one leg can be assigned while the other remains open. For example, a short call in a credit spread may be assigned before a dividend while your long call is still open. Your maximum loss is still defined, but your account may temporarily hold stock, and margin requirements can change.

How to prepare

• Know expiration dates and ex-dividend dates for your positions.
• Close or roll short options that are in the money before expiration if you do not want the shares.
• Keep enough cash or margin for possible assignment.
• Read your broker's expiration procedures and the Characteristics and Risks of Standardized Options.

In TradeThink

Expired contracts are no longer counted as open positions, and stock received or delivered through assignment shows in your trades and transactions. The open positions page shows days to expiration for each option. Related: covered calls and cash-secured puts.