Exercise
To exercise an option is to execute the right of the holder of an option to buy (for call options) or sell (for put options) the underlying security at the striking price.
American Style vs European Style
American-style options allow exercise before expiration, subject to contract and broker deadlines. European-style options permit exercise at expiration. U.S. listed equity options are generally American-style, while index and futures products vary by series.
When an option is exercised by the option holder, the option writer will be assigned the obligation to deliver the terms of the options contract.
Assignment
Assignment takes place when the written option is exercised by the options holder. The options writer is said to be assigned the obligation to deliver the terms of the options contract.
If a call option is assigned, the options writer will have to sell the obligated quantity of the underlying security at the strike price.
If a put option is assigned, the options writer will have to buy the obligated quantity of the underlying security at the strike price.
Once an American-style option has been sold to open, the writer can be assigned before expiration. OCC uses a random procedure to allocate exercise notices to clearing members; the assigned firm then uses an approved method to allocate notices to customer short positions. The holder who exercises is not necessarily matched with the writer on the original trade. Closing a short position requires an executed buy-to-close, and an earlier assignment may already have occurred.
Exercising gives up any remaining time value, so selling an option can be preferable to exercising it. Dividends, financing, stock borrowing, liquidity and contract terms can change that decision. Time value is not a guarantee that a short option will avoid early assignment.
An aggregate historical exercise percentage is not the probability that your short option will be assigned. Exercise decisions depend on the actual series, moneyness, remaining time value, dividends and holder instructions. At expiration, exercise-by-exception and contrary instructions also matter. Confirm the broker’s deadlines and procedures rather than assuming assignment or non-assignment from a quoted closing price alone.
Physical delivery and cash settlement
The share-delivery examples above describe physically settled equity options. Cash-settled contracts instead create a cash obligation based on their specified settlement value and multiplier. Adjusted equity options can have deliverables other than 100 ordinary shares.
Spreads and account obligations
A protective long leg is not automatically exercised whenever a short leg is assigned. A spread can leave an unexpected stock or cash exposure if its legs are treated differently. Confirm the broker's expiration procedures and ability to carry the resulting position. A theoretical expiration loss limit does not eliminate these operational risks.
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References: OIC options basics; OIC assignment; OCC contract adjustments. Editorial standards.
Follow the lifecycle
- Open the option position and pay or receive premium.
- Close through an offsetting trade, or keep it open subject to exercise terms.
- The holder submits exercise, or expiration processing applies with eligible contrary instructions.
- Assignment is allocated to a short position through clearing and broker procedures.
- Shares or cash settle; reconcile the resulting account position.
Buying a standard $40 call for $3 costs $300. Exercising later requires a separate $4,000 share purchase. At stock $46, immediate intrinsic value is $600, giving $300 gross economic gain relative to the premium if shares are valued or sold at $46. If the call could instead be sold for $6.40, exercising discards $40 of quoted time value before transaction differences.
Selling a standard $40 put for $2 receives $200. Assignment buys 100 shares for $4,000. If shares are worth $35, combined value is $3,500 − $4,000 + $200 = −$300 before costs. Premium received did not eliminate the purchase obligation.
For a spread, exercise of the short does not itself exercise the long. Review the long leg’s remaining time value and the account’s funding and delivery procedures. Standard equity exercise settlement is generally T+1 under current OCC specifications; broker instruction cutoffs and account restrictions remain separate facts.
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Reviewed . Examples are illustrative; verify exact contract and broker terms.
References: OIC: exercise procedures; OIC: assignment; OCC: equity option specifications.