July 29, 2019

The Distinction Between Exercising and Being Assigned An Option

When an option is converted to an underlying stock position, there are two categories, exercise and assignment.
An options assignment, you have no control over.  This happens when you are short an option (or short a leg of an option spread) and the buyer of that option exercises his or her right to get long or short the stock. You are theoretically at risk from the point in time that you sell the option until expiration.  Typically, you will not be assigned at least until all of the extrinsic value of that option has gone to zero.  But, it is something that you should be aware of.
In almost all cases, when you own the option, you control if and when you decicde to exercise that option.  There is one exception and it’s an important one.  If you own an option and that option settles $0.01 in-the-money, your broker will exercise that option for you automatically.  For example, if it is Friday and I own a QQQ 194 call expiring that Friday and the QQQ settles at $194.01, I will be long 100 QQQ ETF shares on Monday.
In order for this not to happen, you must contact your broker and tell the you wish to “surrender” your exercise.  In that case, you will not be the owner of the ETF.

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about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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