Exercise and assignment are two sides of the same coin. When you exercise an option, someone gets assigned.
Exercise (Option Buyer's Action)
Exercise means you use your right to buy (call) or sell (put) the underlying stock at the strike price.
Example: You own a $100 call on Tesla at $150. You exercise the call, buying 100 shares at $100 each. You now own the stock.
Most traders close their options by selling them instead of exercising. But if an option is deeply in-the-money and nearing expiration, exercise might make sense.
Assignment (Option Seller's Obligation)
Assignment happens when an option seller is forced to fulfill their obligation. If you sold a call and the buyer exercised it, you're assigned: you must sell 100 shares at the strike price.
When Assignment Happens
- In-the-money options can be assigned anytime, but usually happen at expiration
- Early assignment on calls can happen before expiration if there's a dividend (the buyer wants to get assigned to capture it)
- Early assignment on puts is rare but can happen with deep ITM puts
What Happens
Call assignment:
- 100 shares are sold from your account at the strike price
- You receive the cash
- If you don't own the shares, you're short 100 shares
Put assignment:
- 100 shares are purchased and added to your account
- Cash leaves your account to pay for them
- You now own 100 shares
Managing Assignment Risk
- Sell covered calls (own the stock) to avoid being forced short
- Close positions before expiration if you don't want assignment
- Monitor early assignment risk on dividend dates
Related: Exercise, Assignment, Expiration Date
