assignment notice explained simply

An assignment notice is a formal notification sent to the seller (writer) of an options contract, informing them that the buyer (holder) has chosen to exercise their right to buy (

In the world of options trading, an assignment notice is a critical event for option sellers. When an individual sells (writes) an options contract, they take on an obligation to either buy or sell an underlying asset at a specified price (the strike price) by a certain date (the expiration date), should the option buyer choose to exercise their right. An assignment notice is the official communication that this obligation has been triggered. For call options, receiving an assignment notice means the seller must deliver the underlying shares at the strike price. For put options, it means the seller must buy the underlying shares at the strike price. This notice is typically delivered through a trader's brokerage firm.

The process begins when an option holder decides to exercise their option. This instruction goes to their brokerage, which then notifies the Options Clearing Corporation (OCC). The OCC, which guarantees option trades, then uses a random allocation method to assign the exercise notice to a brokerage firm that has clients who are short (have sold) that specific option. The brokerage firm, in turn, selects one of its short option holders, usually through a random or 'first-in, first-out' (FIFO) method, to receive the assignment notice. It's important for option sellers to understand that while they might anticipate an assignment if their option is in-the-money, they cannot predict precisely when or if they will receive a notice before expiration, or if it will be an early assignment. Being assigned means the option seller must prepare to fulfill their end of the contract, which could involve significant capital movement if they do not already hold the underlying shares (for a covered call) or sufficient cash (for a cash-secured put).

Why it matters

- An assignment notice signals a mandatory transaction for the option seller. It means they can no longer simply let the option expire worthless for a profit; they must now fulfill their contractual obligation to buy or sell the underlying asset.
Understanding the potential for an assignment notice is crucial for risk management. Option sellers need to have a clear plan for how they will handle assignment, whether by having the underlying assets or sufficient capital readily available.
Receiving an assignment can significantly alter a trader's portfolio. For instance, being assigned on a short call option means selling shares they might have intended to hold longer, while being assigned on a short put means acquiring shares they might not have planned to buy.

Common mistakes

- One common mistake is not having enough capital or the underlying shares to cover the assignment. This can lead to forced liquidation or borrowing at unfavorable rates to meet the obligation, resulting in unexpected costs or losses.
Another error is failing to monitor options positions closely, especially as expiration approaches or if options are deep in-the-money. This can lead to being surprised by an assignment notice and not having ample time to react or adjust the position.
Traders sometimes overlook the costs associated with assignment, such as commissions, fees, and the potential tax implications of the resulting stock transaction. These costs can eat into any profits or exacerbate losses, so they must be factored into trading strategies.

FAQs

What happens after I receive an assignment notice?

After receiving an assignment notice, your brokerage firm will automatically process the transaction to fulfill your obligation. For a short call, you will sell the underlying shares at the strike price; for a short put, you will buy the underlying shares at the strike price.

Can I prevent an assignment notice?

You can prevent assignment by closing your short options position (buying back the option you sold) before you receive an assignment notice. Once the notice is issued, the assignment is mandatory and cannot be avoided.

Who sends the assignment notice?

While the decision to exercise comes from the option holder, the actual assignment notice is formally sent by your brokerage firm after they receive notification from the Options Clearing Corporation (OCC).