Calculation and mechanics
After an exercise, the clearing house OCC allocates the obligation to a clearing member. The broker then distributes the assignments received to customers with matching short positions according to its established procedure. Interactive Brokers uses a random-based procedure for this.
For a standardised US stock or ETF option, one contract normally covers 100 shares. For adjusted contracts, for example after corporate actions, the deliverable can differ. The cash effect of a physical assignment follows from strike, deliverable and number of contracts.
American-style options can be exercised before expiration, European-style options only at expiration. Early assignments occur especially in options with little remaining time value. For calls, an upcoming ex-dividend date additionally plays an important role.
Distinction
Exercise is the holder's decision, assignment the resulting obligation for the seller. Both are to be distinguished from the expiration. Anyone who wants to avoid an assignment has to close or roll the short option before the exercise.
A roll to another strike or a later expiration is often used to continue the existing position and to reduce or postpone the immediate assignment risk.
Sources
Related terms
- Expiration (Expiry)
- Ex-Dividend Date (Ex-div)
- Contract Multiplier (Multiplier)
- Sold Premium (Short premium, sold option premiums)
- Roll and Roll Efficiency (Rolling)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.