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Assignment Risk

Assignment risk is the possibility that a short option holder will be required to fulfill their obligation before or at expiration.

Assignment occurs when the holder of an option exercises their right to buy (call) or sell (put) the underlying shares. For the option seller (writer), assignment means you must deliver shares if you sold a call, or buy shares if you sold a put. While assignment typically happens at expiration, American-style options can be exercised at any time, leading to early assignment. Understanding when and why early assignment occurs is crucial for managing short option positions.

Early assignment most commonly happens on deep in-the-money options with little time value remaining. For example, if you sold a $180 put on AAPL now trading at $150, the put has $30 of intrinsic value and almost no time value. The put holder may exercise early to receive cash and deploy it elsewhere. Dividend captures are another trigger: if you sold a $200 call on a stock trading at $205 that goes ex-dividend tomorrow, the call holder may exercise to capture the dividend, even if some time value remains.

Pin Risk

Pin risk is the most dangerous form of assignment risk, occurring when the underlying closes exactly at the strike price at expiration. The option seller doesn't know if they'll be assigned until the following trading day. Meanwhile, the stock can gap against you at the next open. For example, if SPY closes at $450 and you sold the $450 put, you face overnight uncertainty. If SPY gaps down to $440 on Monday, you're caught holding shares you bought at $450 through assignment. This is why many traders close positions before expiration rather than letting them run to the final bell.

Managing Assignment Risk

Several techniques reduce assignment risk. Close or roll positions before expiration, particularly for at-the-money or deep in-the-money options. Monitor dividend ex-dates and close short calls before the ex-date to avoid early assignment. Use European-style index options (SPX, NDX) which cannot be exercised early. Set alerts for when short options reach 80% of maximum profit and consider closing at that level. Maintain sufficient margin or cash to handle unexpected assignments, especially during earnings season when volatility and assignment risk increase.

FAQs

Can I refuse assignment?

No. If the option holder exercises, assignment is mandatory. The OCC randomly selects accounts to fulfill assignments. Your broker will notify you, and the shares will be delivered or received.

When do I find out about early assignment?

Your broker typically notifies you by the morning after the exercise date. The shares will appear in your account before the market opens, often around 7-8 AM ET.

Does assignment happen automatically at expiration?

For in-the-money options, yes. The OCC automatically exercises any option that is $0.01 or more in-the-money at expiration. Out-of-the-money options expire worthless without action.

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