Financial Glossary
Assignment
The obligation: when an option buyer exercises and the seller must deliver.
What is Assignment?
Assignment occurs when an option holder exercises their right and the option seller is obligated to fulfill the contract. If you sell a call and the buyer exercises, you must sell 100 shares at the strike price. If you sell a put and the buyer exercises, you must buy 100 shares at the strike price. Assignment is random—you don't choose which sold options get assigned; the exchange assigns them to sellers based on various algorithms.
For call sellers, assignment means you must deliver stock (selling it at the strike price, regardless of current market price). For put sellers, assignment means you must buy stock (at the strike price). Assignment typically happens when an option is in-the-money and close to expiration, but it can happen anytime. Early assignment on puts is common if the stock pays a dividend soon.
Assignment Management
For covered call writers (owning stock and selling calls), assignment is fine—you sell the stock at the predetermined strike. For naked call sellers (shorting calls without owning stock), assignment forces a short stock position, which involves borrowing shares and margin costs. For put sellers, assignment forces you to hold the stock if it drops, so you need sufficient capital.
To avoid unwanted assignment, traders can buy back (close) their short options before expiration. This locks in profit and eliminates assignment risk. Understanding assignment risk is essential for planning naked short positions and managing capital.
Disclaimer: Assignment can occur unexpectedly and create forced stock positions. Naked call assignment can result in significant losses if the stock rises sharply. Before selling options, ensure you understand and can manage assignment risk. Consult a qualified financial advisor. Options involve substantial risk.