Assignment Day: What Actually Happens When Options Get Exercised Against You

Look, I've been trading options for over two decades, and I can tell you that assignment is one of those things that sounds scarier than it actually is.

Most new options traders lose sleep over the possibility of getting assigned. They imagine their account blowing up overnight or getting stuck with positions they can't handle. But here's the reality: assignment is just a normal part of the options game, and once you understand the mechanics, you'll realize it's actually pretty straightforward.

Let me walk you through what really happens, what you need to know, and why this isn't something that should keep you up at night.

The Basic Mechanics of Assignment

When you sell an option, whether it's a put or a call, you're making a promise. With a put, you're promising to buy shares at the strike price if the option holder exercises. With a call, you're promising to sell shares at the strike price.

Assignment happens when the person on the other side of your trade decides to exercise that option. When they do, your broker matches you with that exercise, and boom, you're now dealing with actual shares instead of just the option contract.

Here's what most people don't realize: assignment doesn't happen randomly during market hours while you're watching CNBC. It happens after the market closes, and you wake up the next morning with shares in your account. The process is actually quite orderly.

The Options Clearing Corporation (OCC) handles all of this behind the scenes. They're the middleman between all options buyers and sellers, making sure everything gets settled properly. When someone exercises an option, the OCC assigns it to someone who's short that option. If multiple people are short, it's done randomly, though realistically, if you're short an in-the-money option near expiration, you should expect assignment.

Put Assignment: When Shares Get Put to You

Let's start with put assignment since that's what most income traders deal with when running strategies like cash-secured puts or the wheel.

You sold a put option on XYZ stock with a $50 strike price. The stock drops to $45, and the option holder exercises their right to sell you shares at $50. On assignment day (which happens after market close on the day of exercise), here's what occurs:

Your account gets debited $5,000 per contract (100 shares × $50 strike price). Those shares show up in your account at your cost basis of $50 per share, even though they're currently trading at $45.

The capital requirement is simple: you need the full cash amount to cover the share purchase. If you sold one put contract, that's $5,000. If you sold five contracts, that's $25,000. This is why it's called a "cash-secured" put, the cash needs to be there.

Now, here's something important: this all happens after hours. You don't get assigned while the market is open. So there's no scenario where you're scrambling during market hours trying to figure out what's happening. You'll see the assignment notice in your account, typically by the next morning when you check your positions.

Call Assignment: When Your Shares Get Called Away

Call assignment works in reverse. If you've sold a covered call against shares you own, assignment means your shares get sold at the strike price.

Let's say you own 100 shares of ABC stock trading at $65, and you sold a call with a $60 strike. If that call gets exercised, your shares are sold at $60, and your account gets credited $6,000. Yes, you "missed out" on the extra $5 per share of upside, but that was the trade you agreed to when you sold the call and collected that premium.

The mechanics are the same, it happens after hours, the transaction posts overnight, and you wake up to find the shares gone and the cash in your account.

The Overnight Risk Factor

Here's where people start to worry: "What if something crazy happens overnight while I'm holding these shares?"

Let's be honest about this, yes, there is overnight risk. If you get assigned on a Friday night and the company announces terrible earnings over the weekend, you could see your shares gap down on Monday morning. That's a real risk.

But let's put this in perspective. First, if you're selling puts on stocks you'd actually want to own at those prices, this shouldn't terrify you. Second, major gaps are relatively rare. Third, this is a known risk that you're being compensated for with the premium you collected.

I've been assigned hundreds of times over my career. The vast majority of the time, the stock opens the next day pretty close to where it closed. When gaps do happen, they can go in either direction, sometimes you wake up and the stock has gapped in your favor.

The key is to only sell puts on stocks where you're genuinely comfortable owning shares at that strike price. If the thought of owning shares overnight makes you panic, you shouldn't be selling puts on that stock in the first place.

Capital Requirements: The Reality Check

This is probably the most important practical consideration with assignment, and it's where a lot of newer traders trip up.

When you sell a cash-secured put, your broker holds the cash as collateral. But when you get assigned, that theoretical obligation becomes a real one. That cash gets deployed to buy shares immediately.

Let's run through a real example. You have a $25,000 account, and you sell five put contracts on a $50 stock. Your broker holds the full $25,000 as collateral. If you get assigned, that $25,000 is now tied up in 500 shares of stock.

Here's what catches people: if you had other positions using margin or borrowing power, assignment can create a margin call. Your available buying power can drop significantly because you're now holding actual shares instead of just having cash set aside.

This is why position sizing matters so much. I generally recommend not using more than 20-30% of your account on any single put sale, specifically to avoid situations where assignment creates capital problems.

Early Assignment: The Exception to the Rule

Most assignment happens at expiration, but it can happen early. This typically occurs with in-the-money options, especially calls on stocks that are about to pay a dividend.

Here's why: if you own a call option on a stock paying a dividend, you don't get that dividend. But if you own the actual shares, you do. So sometimes it makes economic sense for call holders to exercise early to capture the dividend.

With puts, early assignment is less common but can happen if an option is deep in-the-money and has little time value left. The math has to work out that exercising is better than selling the option.

The thing is, you can't really predict when early assignment will happen to you specifically. It's random when the OCC assigns exercises. But you can identify when early assignment is more likely, deep in-the-money options with little time premium, particularly around ex-dividend dates for calls.

Why Assignment Isn't Something to Fear

I think the fear of assignment comes from not understanding what actually happens. It feels like this unpredictable event that could blow up your account.

But think about it logically: if you sold a cash-secured put, you already set aside the cash to buy those shares. Assignment doesn't create a surprise obligation, it's literally the obligation you agreed to when you sold the put. The only "surprise" is the timing.

Same thing with covered calls. You already own the shares. Assignment just means they get sold at the price you agreed to. Again, no surprise here.

The real question isn't "what if I get assigned?" It should be "am I okay with the obligation I'm taking on when I sell this option?" If the answer is yes, assignment is just the mechanism that fulfills that obligation.

I've had positions get assigned that I would have preferred to hold longer. I've had assignments happen at less-than-ideal times. But I've never had an assignment that was financially catastrophic, because I only sold options on positions where I was genuinely comfortable with the obligation.

Managing Assignment Risk

Even though assignment isn't scary, you still want to manage it intelligently.

First, monitor your in-the-money short options as expiration approaches. If an option is just slightly in-the-money, you might get assigned or you might not. If it's deeply in-the-money with no time value left, assignment is virtually certain.

Second, if you don't want assignment, you can close the position before expiration. Yes, you'll pay to buy back the option, but you maintain control. Sometimes this makes sense, especially if your situation has changed or you've identified a better opportunity.

Third, understand your broker's assignment policies. Most brokers will automatically close options positions that are in-the-money at expiration if you don't have sufficient capital to handle assignment. This is meant to protect you, but it also means you might get forced out of positions at the last minute at unfavorable prices.

Finally, keep enough cash in your account to handle assignment comfortably. Don't max out your buying power selling puts, because then assignment creates a capital crunch.

The Ex-Dividend Scenario

Since we're talking about assignment mechanics, we need to address the dividend situation with covered calls.

If you're short a call option that's in-the-money and the stock is about to pay a dividend, there's a decent chance you'll get early assignment. The call holder wants to own the shares to capture that dividend.

This isn't necessarily bad for you. You still keep all the premium you collected from the call. You just don't get the dividend because your shares got called away before the ex-dividend date.

Some traders try to buy back calls before ex-dividend dates to avoid this. Others just let it happen and view it as part of the normal covered call cycle. Neither approach is wrong, it depends on your priorities and the specific numbers involved.

What Happens on Assignment Day

Let me walk through the actual timeline, because understanding the process makes it less mysterious.

During market hours: Nothing happens yet, even if your option is in-the-money. Trading continues normally.

After market close (4:00 PM ET): Option holders have until 5:30 PM ET (though some brokers have earlier internal deadlines) to inform their broker they want to exercise. Most deep in-the-money options get auto-exercised.

That evening: The OCC processes all exercise notices and randomly assigns them to traders who are short those options.

Overnight: Your broker processes the assignment, debiting or crediting your account accordingly.

Next morning: You wake up to find shares in your account (for puts) or cash replacing your shares (for calls), along with an assignment notice explaining what happened.

The actual mechanics are handled entirely by computers and clearing systems. From your perspective, you just see the end result in your account the next morning.

Assignment and Taxes

Quick note on taxes, because this matters: assignment has tax implications just like any stock transaction.

If you get assigned on a put, your cost basis in those shares is the strike price minus the premium you collected. If you later sell those shares, that sale is a taxable event.

If you get assigned on a covered call, it's treated as selling your shares. Your gain or loss depends on your original cost basis in those shares plus the premium you collected.

I'm not a tax advisor, but these are mechanics you need to be aware of, especially if you're running strategies like the wheel where assignments happen regularly.

The Bottom Line on Assignment

Assignment is not an emergency. It's not a failure. It's just the natural conclusion of the obligation you took on when you sold that option.

The reason we collect premium when we sell options is specifically because we're taking on these obligations. The premium compensates us for agreeing to buy shares at a certain price (puts) or sell shares at a certain price (calls).

Once you reframe assignment this way, as the normal fulfillment of a voluntary obligation rather than some random catastrophe, it becomes much easier to manage psychologically.

Yes, you need to understand the mechanics. Yes, you need to maintain adequate capital. Yes, there are risks, particularly overnight risk. But these are all manageable, known risks that you're being compensated to take.

After 23 years of trading options professionally, I can tell you that assignment is routine. Some months I get assigned multiple times. Some months I don't get assigned at all. Either way, it's just part of running these strategies.

The traders who succeed with options over the long term are the ones who understand assignment, plan for it, and don't panic when it happens. They size positions appropriately, maintain adequate capital, and only take on obligations they're genuinely comfortable fulfilling.

That's the real secret to assignment: there is no secret. It's just another piece of the options puzzle, and once you understand how it works, you can incorporate it into your overall strategy without worry.

Probabilities over predictions,

Andy Crowder

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Disclaimer: This is educational content only. Not investment, tax, or legal advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money