Exercising Options and Being Assigned

To this point we have defined options using the first three points below. Now we add to this definition when this takes place.

  1. The right or obligation
  2. To buy or sell
  3. If the price of the underlying security is through the strike price (in the money)
  4. At– and sometimes before — expiration

There are two types of exercise and assignment which define if exercise and assignment can happen only at expiration or if exercise and assignment are allowed prior to expiration.

  • American options: may be exercised anytime before expiration as long as the underlying security is ITM.
  • European options: may only be exercised at expiration

Here is a general description of the markets that have different exercise and assignment styles.

  • Stocks and ETFs are all American style options.
  • Some indexes are American style options.
  • Options on Futures contracts are a mix of American and European style.
  • Most of the actively traded indexes are European style options.

Here’s a device to help you remember which style allows for early exercise and assignment: America is younger than Europe; so America has been around for a shorter amount of time. You can think about American style options as having the potential to be held for a shorter amount of time until they are exercised.

The specific issue with this is that sellers of American style options may be subject to assignment prior to expiration — which changes their portfolio earlier than expected.

An early assignment is rare, except for short calls where the underlying stock is due to pay a dividend. Long call holders will often exercise their option in order to collect the dividend.

A final note on exercise and assignment: Pairing the parties who will exchange the underlying is done by a random process. Not first in first out or any other specific method.