Early Assignment

Early Assignment happens when an option contract owner exercises their right to buy or sell a security for the Strike Price of their contract before expiry. The exchange where the option contract is being sold will choose an Option Writer at random.

If the Assignment is for a Call Option, the writer (seller) is obliged to sell the Call Option owner a given asset or commodity for the Strike Price of the option. In the case of a Put Option, the Option Writer is obliged to buy the asset or commodity from them at the Strike Price.

Early Assignment is applicable for American Style Options, but not European Style Options because they cannot be exercised prior to expiry. Selection of option writers is carried out by a random lottery to choose a brokerage firm who can apply their own criteria for selecting one of their clients who has sold the option.

Options are not typically exercised early because the option contract holder gives up both the intrinsic and Extrinsic Value upon Assignment, but there are some reasons why it can occur, for example, if the Underlying is a stock that is about to go ex-dividend and the option owner wants to receive the dividend. The Option contract owner must Exercise if they wish to to become a stock holder and therefore eligible to receive the dividend. Simply owning the Call Option does not give them any rights to receive this payment.

There are various other reasons for early Assignment, another example might be because the option owner needs to fulfil obligations themselves as an Option Writer or because the price of the Underlying has increased or decreased significantly. In general, however (and excluding the ex-dividend scenario described) Options are usually simply traded back into the market for a profit or loss rather than being exercised.