Assignment (Options)

Definition

The term assignment refers to a notification by the Options Clearing Corporation that the owner of an option exercised their rights.  Assignments for equity and index options are made on a random basis.

Explanation

When an investor writes an option, they can be assigned if the holder of the option exercises their rights.  The word "assignment" refers to the process of being "assigned" to deliver the terms of their options contract.  When a call option is assigned, the writer is obligated to sell the holder the number of shares specified in the contract at the option's strike price.  When a put option is assigned, the writer is obligated to purchase the number of shares specified in the contract at the option's strike price.

With an American option, the possibility of assignment can happen any time before the contract's expiration date.  The Options Clearing Corporation uses a random procedure to ensure the distribution of assignments is accomplished in a fair manner.  The assignment notifications are sent to a Clearing Member, who then uses an exchange-approved process to allocate the assignment to individual investors.

Assignment typically occurs as the option approaches expiration.  This is because holders of in-the-money options may wait if there is still time left before expiration to see if it will go deep-in-the-money.  If the holder of an in-the-money option wishes to exit the contract, they also can sell the in-the-money option.

Related Terms

adjustment, cash-backed call, bull call spread