Assignment (Option)

When you sell, or write, an option, you take on an obligation. If the buyer exercises, you must sell the underlying asset at the strike price, for a call, or buy it at the strike price, for a put. Being told you must do this is called being assigned.

For example, suppose you sold a put option with a strike price of 30 and the share falls to 25. If the buyer exercises, you are assigned and must buy the shares at 30, even though they are worth only 25, a loss of 5 per share before the premium you received.

On exchanges, the clearing house matches exercised options with sellers, usually through a random or fair allocation process, so the seller does not know in advance whether they will be assigned.

Sellers of American-style options can be assigned at any time before expiry, although early assignment is relatively uncommon unless the option is deep in the money or a dividend is about to be paid. Sellers of European-style options can only be assigned at expiry. Anyone selling options should be prepared for assignment and have the cash or shares to meet it.