Option assignment occurs when the buyer of an option decides to exercise their right to buy (call) or sell (put) the underlying asset. As the seller (writer) of the option, you are obligated to fulfill this request. For a call option, this means selling the underlying asset at the strike price. For a put option, this means buying the underlying asset at the strike price.
Options can be assigned at any time before expiration, especially if they are deep in-the-money. This can happen unexpectedly, requiring you to act quickly to fulfill the obligation.
Risk of getting assigned
Depending on the collateral held for a short contract, a few different things can occur:
- Call Option: If assigned, you must sell the underlying asset at the strike price, which might be below the current market price, leading to potential missed gains.
- Put Option: If assigned, you must buy the underlying asset at the strike price, which might be above the current market price, leading to potential losses and drawing on your account cash.
Anticipating assignment
When selling option contracts that are nearing expiration and currently in-the-money, you can anticipate that these contracts may be assigned upon expiry. To avoid assignment, you can take action by buying back the option before expiration. This allows you to avoid the obligation of selling (for calls) or buying (for puts) the underlying shares.
What are the risks of early assignment?
Early assignment can occur if the stock price is significantly below (for puts) or above (for calls) the strike price, leading to unexpected obligations and potential losses.