What is an Options Assignment?
In options trading, an assignment occurs when an option is exercised.
As we know, a buyer of an option has the right but not the obligation to buy or sell an underlying asset depending on what option they have purchased. When the buyer exercises this right, the seller will be assigned and will have to deliver or take delivery of what they are contractually obliged to. For stock options, it is typically 1000 shares per contract for the UK and 100 shares per contract in the US.
As you can see, a buyer will never be assigned, only the seller is at risk of assignment. The buyer, however, can be auto exercised if the option expires in-the-money.
Can Options be assigned before expiration?
In short, Yes, but it depends on the style of options you are trading.
American Style – Yes, this type of option can be assigned on or before expiry.
European Style – No, this type of option can only be assigned on the expiry date as defined in the contract specifications.
Options Assignment Example
For example, an investor buys XYZ PLC 400 call when the stock is trading at 385. The stock in the coming weeks rises to 425 after some good news, the buyer then decides to exercise their right early to buy the XYZ PLC stock at 400.
In this scenario, the call seller (writer) has been assigned and will have to deliver stock at 400 to the buyer (sell their stock at 400 when the prevailing market is 425).
An option typically would only be assigned if it is in the money, taking into account factors like dividends which do play an important role in exercise/assignments.
Can an Options Assignment be Prevented?
Assignment can sometimes come as a bit of a surprise but normally you should see it coming. You can only work to prevent assignment by closing the option before expiry or before any possible risk of assignment.