Exercise and Assignment
A full chapter is being devoted to explaining what you need to know about exercise and assignment so that you can trade with confidence and avoid pitfalls. This chapter compares physical versus cash settlement; compares exercise and assignment for different underlying instruments; and describes American- versus European-style exercise, automatic exercise, exercise and assignment for spread positions, likelihood of exercise, assignment risk, and procedures. Exercise and assignment are addressed throughout this book.
Before discussing exercise and assignment rules and procedures, let us set the stage by reviewing some basic definitions. As a general rule, an option buyer (holder/owner) has a right to exercise an option and an option seller (writer) has an obligation to satisfy it if assigned. A call owner has a right to exercise an option to buy an underlying instrument (or receive cash if an index). A put owner has a right to exercise an option to sell an underlying instrument (or receive cash if an index). A call writer has an obligation to sell the underlying instrument (or pay cash if an index) if assigned. A put seller has the obligation to buy an underlying instrument (or pay cash if an index) if assigned.
It can be a little confusing to try to remember the various rights and obligations for a long call, short call, long put, and short put. As a result, following are general guidelines to help you remember exercise and assignment: ...