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Options, Risk Math, and Psychology · Options Anatomy

Exercise vs assignment

Explain what happens when an option is exercised by the buyer and assigned to a seller.

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Options, Risk Math, and Psychology

Options Anatomy

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Lesson 6 of 75Options, Risk Math, and PsychologyOptions Anatomy

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Explain what happens when an option is exercised by the buyer and assigned to a seller.

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Two sides of the same event

Every option contract has a buyer and a seller. The buyer paid the premium and owns a right. The seller collected the premium and took on an obligation. When that right gets used, two things happen at once — and they have two different names depending on which side you're on.

Two cards: Exercise, the buyer chooses to use the right, and Assignment, the seller must fulfill it with no choice, two names for one event.ExerciseThe buyerchooses to usethe rightAssignmentThe seller mustfulfill it, nochoice
Wick saysExercise is what the buyer chooses; assignment is what happens to the seller.

Exercise is what the BUYER does. The buyer of a call says: 'I'm using my right — give me 100 shares at the strike.' The buyer of a put says: 'I'm using my right — I'm selling you 100 shares at the strike, hand over the cash.' Exercise is a deliberate choice by the buyer (mostly — we'll get to auto-exercise in a second). Buyers exercise when it's profitable to do so.

Assignment is what happens to the SELLER. When the buyer exercises, the clearinghouse (the OCC in the US) randomly selects a seller from the pool of people short that contract and delivers them the obligation. If you sold a call and get assigned, you have to deliver 100 shares at the strike — even if it means buying them at market price first. If you sold a put and get assigned, you have to BUY 100 shares at the strike, even if the stock is now much lower. Sellers don't choose. Assignment happens to them.

A bank-style building labeled OCC with a Clearing seal lists gets the exercise, picks a seller, at random, showing how assignment reaches a seller.OCCClearingGets theexercisePicks asellerAt random
Wick saysWhen a buyer exercises, the clearinghouse picks a seller at random to fulfill it.

Early assignment is the seller's nightmare scenario. American-style options can be exercised any day before expiry. If you sold a call and it goes deep ITM, especially around a dividend ex-date, the buyer might exercise early to collect the dividend. You get assigned suddenly and have to deliver shares. The good news: most options aren't exercised early — it's usually more profitable to sell the option rather than exercise. But around dividends and very deep ITM, the risk is real.

Wick holds a clipboard: check ITM options and close if you can't cover are ticked, forget and hope gets a red X, a habit that avoids surprise shares on Monday.Before expiry FridayCheck ITM optionsClose if you can't coverForget and hope
Wick saysMost ITM options auto-exercise at expiry, so close any you can't afford to hold.

Recap: exercise = buyer uses their right. Assignment = seller is forced to fulfill it. Buyers control exercise; sellers can't predict assignment. Auto-exercise applies to most ITM options at expiry. Early assignment is real on short ITM American-style options.

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Answer before moving on.

0 / 3 answered

1. You SOLD an AAPL $200 call. AAPL closes at $215 on expiry Friday. You forget about it. What likely happens Monday morning?

2. Who decides when an option is exercised?

3. When is early assignment most likely on a short call?

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