Assignment is the notice given to the seller of an option contract that the buyer of the option intends to exercise it.
The owner of a put who chooses to exercise the put will sell the stock at the strike price of the option, regardless of where the stock is currently trading. On the other side of the trade, the seller of the put is simultaneously obligated to purchase the stock at the strike price of the option.
For example, suppose that trader A sells a $25 put to trader B. As the seller of the put, trader A is obligated to take delivery (purchase) of the stock at $25 if price is beneath that level at expiration. Trader B as the buyer of the put has the right to exercise the option and sell stock at $25. If the price of the stock is at $22 by expiration, trader B still gets to sell stock at $25 to trader A.
When the buyer of an option contract exercises their option, the seller must fulfill their obligation by buying or selling the underlying stock at the strike price. Because options are contracts, obligations are enforced by the Options Clearing Corporation (OCC).
There are two different expiration styles which options have: American Style or European Style.
American Style: Because American Style options can be exercised at any time up until expiration, early assignment for option sellers is always possible.
European Style: Because European Style options can only be exercised at expiration, early assignment for option sellers is not a factor.
Return to the main options glossary page to learn more terms.
