The seller of an option contract may be randomly assigned an exercise notice by the buyer of the option contract at any time.
Being short (having sold) options contracts, you may have an obligation to sell (short Call) or buy (short Put) the underlying stock at any time during the life of those options. Since you do not have control over when those options might be exercised by the holder, being short options puts you at risk of assignment at any time. When this happens prior to expiration, it is called early assignment.
Assignment of short options positions is random and can occur at any time, but the risk of assignment can increase based on several factors.
Any short options position (including when part of a defined risk spread) is subject to potential early assignment. This is because the buyer of that option has the right to exercise the option at any time prior to its actual expiration. When the buyer exercises this right, the Options Clearing Corporation (OCC) randomly assigns that exercise notice to an account with a short options position.
While assignment allocation is random, the risk of assignment can increase due to several factors:
- 1.An option is deep in-the-money (and it is preferable for the option buyer to buy or sell the underlying stock at the option strike price)
- 2.The ex-dividend date of the underlying stock or ETF is approaching (and the buyer of a call option wants to own the underlying stock or ETF to collect the dividend)
- 3.Short interest in the underling stock is high and it is hard-to-borrow (and the buyer of a call wants to own the underlying stock to take advantage of higher stock lending fees)
Early assignment requires urgent attention, but is not immediate cause for worry.
If you have been early assigned on a defined-risk spread, with active risk management it can still be possible to close the position while maintaining a defined risk. However, there are several important things to note:
- 1.Available funds balances may be negative since your account is now long or short a stock or ETF position.
- 2.Your account may incur interest charges for the period that balances are negative
- 3.Legging out of the position can result in an increased max loss
If an early assignment causes a negative balance in your account, you may be charged interest to borrow the required funds.
You may mitigate this potential interest charge by wiring funds same-day to cover any negative balance. While closing the assigned stock or ETF position will also limit potential interest charges, you may still be charged for the time it takes the stock or ETF to settle. While standard stock settlement is T+2 (two business days), a weekend and/or holiday may cause this interest period to be extended.