Understanding the concepts of exercise and assignment are essential to comprehending the options trading process from start to finish.
Let’s start out with the exercise process. Exercising can be associated with going long on a call or put. The assignment can be associated with going short on a call or put.
So what do these two terms really mean? We’ll start out with the options exercising process.
When the buyer of a long call or put uses their right to buy (in the case of a call) or sell (in the case of a put), he or she must let the seller of the option contract know first, which is called an exercise notice. At that time, the seller is obligated to deliver the underlying shares to the buyer at the agreed upon price.
Although most options traders do not exercise their options and instead either allow their contracts to expire worthlessly or close them out, it is still essential to know what happens during the exercising process to get the big picture.
Put options are different than calls in that they require a traditional margin account to exercise them, which is not a feature that we currently offer at this time but plans to offer in the future.
Now let’s take a look at the assignment process. An assignment is the flip side of the coin from exercising and takes place on the seller’s side. It happens when someone who is short a call or put is forced to sell (in the case of a call) or buy (in the case of a put) the stock.
Unlike exercising, the assignment process is an obligation, not a right. The seller must deliver, or “assign,” the underlying shares at the stated strike price when the buyer requests it.
Remember, you must have a current cash balance that is high enough to cover exercising an option, or the contract will experience worthless. If you do have enough cash to perform the options exercise, shares will be assigned to your account, and you’ll be able to sell those shares at a later date. There will be no fees to sell those shares.
We hope that these two concepts are now a little easier to wrap your head around.