Assignment
Assignment
The process by which an option writer (seller) is required to fulfill their contractual obligation when the option holder exercises. The Options Clearing Corporation (OCC) randomly assigns exercise notices to clearing member firms, who then assign them to specific short option positions. Call writers must sell the underlying security at the strike price; put writers must buy the underlying security at the strike price. Assignment is automatic and cannot be refused once notified.
Sarah sells (writes) 2 covered call options on XYZ stock with a $50 strike price and collects $300 in premium. When XYZ rises to $58, the call buyer exercises. The OCC randomly assigns the exercise notice, and Sarah is assigned, requiring her to sell 200 shares at $50 per share (missing out on the $58 market price). Alternatively, Tom sells a put option on ABC with a $40 strike for $200 premium. When ABC falls to $32, the put buyer exercises. Tom is assigned and must buy 100 shares at $40 per share, even though the market price is only $32.
Students often confuse assignment (writer's obligation) with exercise (holder's right), thinking writers can choose whether to accept assignment. They also forget that the OCC randomly assigns exercises among eligible short positions, not based on when the option was sold or who sold it. Another error is not understanding that assignment means immediate obligation: call writers must deliver shares (risky if naked), and put writers must buy shares (requiring capital). Many also confuse covered vs naked assignment risk: covered call writers already own shares, but naked call writers must buy shares at market price to deliver.
How This Is Tested
- Identifying who gets assigned when an option is exercised (the writer/seller, not the buyer)
- Understanding the OCC's role in randomly assigning exercise notices to short positions
- Determining what obligation is triggered by assignment: call writers must sell, put writers must buy
- Calculating losses for assigned writers when market price differs significantly from strike price
- Recognizing the risks of naked option positions when assigned (unlimited loss for naked calls)
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Options settlement | T+1 | Assignment and exercise settle one business day after trade date |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Mark sold 5 naked call options on DEF stock with a $60 strike price for a $4 premium per share when DEF was trading at $58. DEF rises to $75, the call buyers exercise, and Mark is assigned. Mark does not own DEF shares. What is Mark's obligation and potential loss?
B is correct. When assigned on a naked call, Mark must deliver 500 shares at the $60 strike price to the call buyer. Since he doesn't own the shares (naked position), he must buy them at the current market price of $75, then deliver them at $60. This creates an $11 per share loss: $75 (buy) - $60 (sell) = $15 loss, minus the $4 premium received = $11 net loss per share, or $5,500 total loss on 500 shares. This illustrates the unlimited loss risk of naked call writing.
A is incorrect because Mark must buy at the market price ($75), not the strike price ($60). The strike price is what he must sell at, not buy at. C is incorrect because assignment cannot be refused. Once the OCC assigns an exercise notice, the writer must fulfill the obligation regardless of whether it's profitable. Writers have obligations, not choices. D is incorrect because physical delivery of shares is required for equity options (American-style), not cash settlement. Mark must actually buy and deliver the shares.
The Series 65 exam tests your understanding that assignment creates an inescapable obligation for option writers. Naked call writing has unlimited loss potential because the market price can rise indefinitely above the strike price, forcing the writer to buy high and sell low. This makes naked calls unsuitable for most clients and demonstrates why advisers must understand the mechanics and risks of assignment when recommending options strategies.
What role does the Options Clearing Corporation (OCC) play in the assignment process?
B is correct. The OCC acts as the central clearinghouse for all options contracts and randomly assigns exercise notices to clearing member firms (brokerages) that have customers with short (written) option positions. The clearing firms then allocate these assignments to specific customer accounts, typically on a random or first-in-first-out (FIFO) basis. This random assignment process is a critical feature of the options market.
A is incorrect because the OCC uses a random assignment process among clearing members, not based on when specific investors sold their options. Individual account assignment is determined by the clearing firm, not the OCC. C is incorrect because assignment cannot be refused under any circumstances. Once the OCC assigns an exercise notice, the writer must fulfill their contractual obligation. D is incorrect because American-style options can be exercised (and therefore assigned) at any time before expiration, not just at expiration. Assignment can occur any trading day.
The Series 65 exam tests your understanding of the OCC's role as the guarantor and clearinghouse for all options contracts. The random assignment process means option writers cannot predict when they will be assigned, creating uncertainty that advisers must explain to clients. Understanding that assignment can happen anytime (for American-style options) is critical for managing client expectations and ensuring suitability.
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Access Free BetaAn investor wrote 3 put options on JKL stock with a $45 strike price, receiving a $3 premium per share. JKL falls to $38, and the investor is assigned. What is the investor's net loss per share when assigned (assuming immediate sale at market price)?
A is correct. Calculate: When assigned, the put writer must buy shares at the $45 strike price. The current market value is $38. Loss from assignment: $45 (buy price) - $38 (market value) = $7 loss per share. However, the writer received a $3 premium when selling the put. Net loss: $7 - $3 premium = $4 loss per share. Total loss on 3 contracts (300 shares): $4 × 300 = $1,200.
B ($7) represents the gross loss without accounting for the premium received. While the assignment itself creates a $7 per share loss, the net loss must include the $3 premium income. C ($3 gain) incorrectly treats the premium as pure profit, ignoring the $7 assignment loss. The premium reduces the loss but doesn't create a profit here. D ($10) incorrectly adds the premium to the loss instead of subtracting it ($7 + $3 = $10), which reverses the premium's effect.
The Series 65 exam tests your ability to calculate the true cost of assignment by factoring in both the assignment obligation and the premium received. Put writers must have sufficient capital to buy shares at the strike price when assigned, and the premium provides only partial protection against market declines. Understanding net loss calculations helps advisers evaluate whether clients can afford the capital commitment and loss potential of writing puts.
All of the following statements about option assignment are accurate EXCEPT
C is correct (the EXCEPT answer). This statement is FALSE. American-style options (most equity options in the U.S.) can be exercised and assigned at ANY time before expiration, not just at expiration. Writers face assignment risk from the moment they sell the option until expiration or until they close the position. European-style options (like some index options) can only be exercised at expiration, but American-style is the standard for equity options tested on the Series 65.
A is accurate: assignment is a mandatory obligation that cannot be refused. Once the OCC assigns an exercise notice, the writer must fulfill the contract. Writers have obligations, buyers have rights. B is accurate: when assigned on a call option, the writer must sell (deliver) the underlying shares at the strike price, regardless of the current market price. This is why covered calls are safer than naked calls. D is accurate: when assigned on a put option, the writer must buy (accept delivery of) the underlying shares at the strike price, regardless of current market price. This requires capital availability.
The Series 65 exam tests your understanding that American-style options carry assignment risk at any time, not just at expiration. This is critical for client education because dividend dates, takeover announcements, or deep in-the-money positions can trigger early exercise and assignment. Advisers must ensure clients understand that assignment can occur unexpectedly and that they have the capital or shares to meet the obligation at any time.
A client writes 10 naked call options on MNO stock with a $70 strike price for a $5 premium when MNO trades at $68. MNO surges to $90, and the calls are exercised, resulting in assignment. Which of the following statements are accurate?
1. The client must deliver 1,000 shares of MNO at $70 per share
2. The client's maximum loss was limited to the $5 premium per share when they wrote the calls
3. The client must buy 1,000 shares at the current market price ($90) to fulfill the delivery obligation
4. The client will experience a $15 per share net loss after accounting for the premium received
B is correct. Statements 1, 3, and 4 are accurate.
Statement 1 is TRUE: When assigned on 10 call option contracts (each contract = 100 shares), the writer must deliver 1,000 shares at the $70 strike price. This is the contractual obligation of the call writer.
Statement 2 is FALSE: The maximum loss for naked call writers is UNLIMITED, not limited to the premium. While the writer received $5 per share in premium, the stock price can rise indefinitely, creating potentially unlimited losses. In this case, the stock rose to $90, creating a $20 per share gross loss (before premium). This is the key risk of naked call writing.
Statement 3 is TRUE: Since the client does not own the shares (naked position), they must buy 1,000 shares at the current market price of $90 to deliver them to the call buyer at $70. This is why naked calls are so risky.
Statement 4 is TRUE: Calculate net loss: Buy shares at $90, deliver at $70 = $20 gross loss per share. Subtract the $5 premium received: $20 - $5 = $15 net loss per share. Total loss: $15 × 1,000 shares = $15,000.
The Series 65 exam tests your understanding that naked call writing has unlimited loss potential, making it unsuitable for most clients. Unlike option buyers (limited loss = premium) or covered call writers (limited loss = opportunity cost), naked call writers face potentially catastrophic losses if the stock price rises significantly. Advisers must understand assignment mechanics and the capital requirements to fulfill obligations when recommending any option writing strategies. This example shows why naked calls require high risk tolerance, substantial capital, and sophisticated understanding.
💡 Memory Aid
Assignment = homework you MUST do (seller's obligation when buyer exercises). OCC randomly assigns exercise notices like a teacher randomly calling on students. Call assigned = you sell (deliver shares). Put assigned = you buy (accept shares). Remember: "Writers Write checks" when assigned (call writer buys shares to deliver, put writer buys shares to keep).
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