What is an assignment (financial meaning)?
An assignment is the legal transfer of rights and obligations tied to an asset, contract, or property from one party to another. In finance, that can mean transferring the right to collect a payment, the obligations under a loan or lease, or the duty to deliver or accept shares under an options contract. For an assignment to be effective it typically requires parties with legal capacity, consideration (something of value), consent, and a lawful object.
Common uses and forms
– Wage assignment (garnishment): A court or creditor requires an employer to withhold money directly from an employee’s paycheck to pay past-due obligations (child support, taxes, loans). This is a forced withholding rather than a voluntary transfer.
– Mortgage assignment: A mortgage lender’s interest in a loan or mortgage deed is transferred to another lender or investor. The assignment document directs where the borrower should send future payments and may be recorded in public land records.
– Lease assignment: A tenant transfers their lease rights and responsibilities to another tenant; the incoming tenant then pays rent and performs lease duties. Separately, a landlord can assign rental income to a lender (assignment of rents) as collateral for a mortgage.
– Options assignment: When an option holder exercises their right to buy or sell shares at the strike price, the options clearing process randomly selects a seller (writer) of the corresponding option position and assigns the obligation to that seller. The assigned writer must either sell shares (if assigned on a call) or buy shares (if assigned on a put) at the strike price.
Key legal requirements for any assignment
– Legal capacity: Parties must be legally capable of entering the agreement.
– Consideration: Something of value usually must pass between parties (unless a gratuitous assignment is otherwise permitted).
– Consent: The assignor must intend to transfer rights; some contracts require the counterparty’s consent.
– Lawful purpose: The subject of the assignment must be legal.
Short checklist before initiating or accepting an assignment
– Verify that the contract permits assignment (check anti-assignment clauses).
– Confirm the parties have legal capacity and authority to assign.
– Prepare a written assignment document that identifies the rights/obligations being transferred.
– Determine whether public recording or lender/third‑party notification is required (common for deeds/mortgages).
– Confirm effective date and any change in payment instructions.
– For securities/options: check broker/dealer and clearing house rules; for options sellers, confirm margin requirements.
– Retain proof of delivery and receipt (recorded document, acknowledgement).
Options assignment
When an option holder exercises, assignment transfers the opposite side of that obligation to a writer (seller). The practical lifecycle and consequences:
How assignment works (step‑by‑step)
– Holder submits exercise instruction to their broker or exercises automatically at expiration.
– Broker forwards an exercise notice to the Options Clearing Corporation (OCC), which stands between the exercising party and the market.
– OCC assigns that exercise notice to a clearing member (a broker‑dealer) using its allocation procedures.
– The clearing member assigns the exercise to one of its customers who is short the same option contract, according to the firm’s published method (random, FIFO, pro rata, etc.). Brokers must disclose their assignment method in account agreements.
– The assigned customer’s account is debited or credited for the underlying security or cash (depending on settlement type), and margin requirements adjust immediately.
Key
considerations and strategies for option writers (short positions)
– Early assignment risk: American‑style options (which can be exercised any time before expiration) carry the possibility of early assignment. This is most likely when the option is in the money (ITM; intrinsic value > 0) and there is a meaningful dividend or interest carry that makes exercise economically attractive to the option buyer. European‑style options can be exercised only at expiration, so early assignment risk does not apply to them.
– Example (why early exercise can occur): Suppose a stock trades at $50, a call with strike $49 is held by the buyer, and an upcoming dividend is $0.60. If the call premium is trading at $1.00, the buyer might exercise early to own the stock and capture the $0.60 dividend, which can be worth more than the time value remaining in the option. The seller of that call can therefore be assigned before the ex‑dividend date.
– Immediate cash and position effects: If you are assigned:
– Short call assigned: you must deliver 100 shares per contract (or buy them in the market to deliver), and your account is credited with the strike price × 100 less any transaction costs.
– Short put assigned: you must buy 100 shares per contract at the strike price; your account is debited by strike × 100.
Settlement and margin balances adjust immediately; brokerage rules and the requirement to post additional margin can produce a margin call if you lack funds or collateral.
– Covered versus naked positions: Assignment risk is the core reason some traders write covered calls (own the underlying) rather than naked calls. With a covered call, assignment results in delivery of stock you already own. With a naked call, assignment requires you to acquire and deliver stock at the strike, which can produce unlimited losses if the stock has moved strongly against you.
Practical checklists — before selling (writing) an option
1. Confirm option style: American or European.
2. Check dividend schedule and ex‑dividend dates for the underlying.
3. Review open interest and liquidity (bid‑ask spread).
4. Know your broker’s assignment allocation method (random, FIFO, pro rata) — it must be disclosed in your account agreement.
5. Ensure sufficient buying power or margin to cover potential assignment.
6. Have an exit plan (close, roll, or accept assignment) and know associated costs.
How to manage or reduce assignment risk
– Close the short option position before the ex‑dividend date or before it becomes deeply ITM.
– Roll the option: buy back the short option and sell another with a later expiration or different strike (this defers obligation).
– Use covered positions when you don’t want the risk of sudden delivery obligations.
– Trade European‑style products if you need certainty that exercise only happens at expiration (common for some index options).
– Monitor and set alerts for large moves in the underlying or imminent corporate actions (dividends, calls, mergers).
Worked examples
1) Covered call assigned at expiration
– Position: long 100 shares bought at $40.00 (cost = $4,000). Sold 1 call (100 shares) strike $45 for $2.00 premium (credit = $200).
– Scenario at expiration: stock = $47 → call is ITM and is exercised.
– Cash flows: receive $4,500 (45 × 100) for delivery of shares + keep premium $200 → total proceeds = $4,700.
– Net profit = $4,700 − $4,000 = $700 → return = 700 / 4,000 = 17.5% (not annualized).
– Outcome: assignment realized the gain; if you wanted to keep the stock, you should have closed the short call ahead of time.
2) Short put assigned at expiration (purchase obligation)
– Position: sold 1 put strike $40, premium received $1.50 (credit = $150).
– Scenario at expiration: stock = $35 → put exercised; you are assigned and must buy 100 shares at $40 (debit = $4,000). Effective cost basis = 4,000 − 150 = $3,850 → per‑share basis = $38.50.
– If you intend to hold the shares, the assignment is equivalent to having bought them at $38.50; if you wanted to avoid owning shares, you should have closed the short put before expiration.
Tax and recordkeeping considerations
– Assignment results in an actual purchase or sale of the underlying security and therefore is a taxable transaction. Holding periods for capital gains/losses are affected by the date of assignment.
– Premiums received when writing options affect your cost basis (short put assigned lowers cost basis; short call assigned increases proceeds).
– Consult a tax professional for specifics; wash‑sale rules and other tax details can be complex.
What the broker and OCC do after an exercise notice
1. Holder instructs broker to exercise (or it auto‑exercises near expiration if ITM by broker policy).
2. Broker forwards exercise notice to the Options Clearing Corporation (OCC).
3. OCC allocates
3. OCC allocates exercise notices to clearing members who carry short positions in that option series. The OCC’s allocation to clearing firms is effectively random or pro rata; once a firm receives an allocation, the firm assigns the exercise to one of its customer or proprietary accounts using its internal method (common methods include first‑in/first‑out, random, or customer‑priority rules). Brokerage firms must disclose their allocation procedure in account agreements.
4. The broker notifies the customer whose short position was assigned. That notice will state the option series, strike, exercise/assignment date, and what the customer must deliver or will receive (cash or shares). The broker also determines any margin requirements and may require immediate funds or securities to meet the obligation.
Settlement and timing
– Physical delivery options (typical for U.S. equity options): assignment results in a stock trade that settles regular‑way, normally two business days after the trade date (T+2). The assigned writer must deliver or receive 100 shares per contract on the settlement date unless the broker covers or nets positions beforehand.
– Cash‑settled options (common for index options): exercise/assignment results in a cash payment. The timing depends on the contract terms; many are settled the next business day or per the exchange’s rules.
– Exercise‑by‑exception (auto‑exercise): the OCC will generally exercise options at expiration that are in‑the‑money (ITM) by at least $0.01 unless the holder instructs otherwise. Brokers often set their own thresholds (for example, $0.05) and may override auto‑exercise instructions per customer directives.
Worked numeric examples
– Short call assignment (seller of a call is assigned):
– Position: short 1 ACME 50 call (1 contract = 100 shares). Premium received = $2.00.
– If assigned: you must sell 100 shares at $50 = proceeds $5,000.
– Net economic result if you did not already own the shares: you still keep the premium, so effective sale proceeds = $5,000 + ($2.00 × 100) = $5,200. If you were short the stock before assignment, other effects occur.
– Short put assignment (seller of a put is assigned):
– Position: short 1 BETA 30 put. Premium received = $1.50.
– If assigned: you must buy 100 shares at $30 = cost $3,000.
– Your cost basis for tax and holding‑period purposes is strike minus premium received = $30 − $1.50 = $28.50 per share → total cost basis $2,850. The holding period for capital gains begins on the assignment (acquisition) date.
Practical checklist for assigned option writers
– Before expiration:
– Monitor in‑the‑money (ITM) options and known early‑exercise catalysts (dividends, corporate actions).
– Close the short option (buy to close) if you want to avoid the possibility of assignment.
– Immediately after receiving assignment notice:
– Verify the details in the broker notice (contract, strike, quantity, date).
– Confirm settlement obligations and any margin call. Provide funds or shares as required or authorize the broker to liquidate/cover if needed.
– Update trade records and tax basis: record assignment date, price, premium received, and resulting cost basis or proceeds.
– For taxes:
– Note the acquisition or disposition date equals assignment date for holding‑period purposes.
– Keep records of option premiums and assignment trades; consult a tax professional for wash‑sale interactions and specific rulings.
Managing assignment risk (practical tips)
– To reduce unwanted assignment risk:
– Close short positions before expiration if you cannot afford the underlying obligation.
– Avoid short calls on stocks you don’t want to deliver if a dividend is imminent (call holders may exercise early to capture dividends).
– Maintain sufficient cash or margin capacity in accounts that carry short option positions.
– If you want physical delivery (for example, to acquire stock by assignment of a short put), plan capital and tax implications in advance.
Example sequence (step‑by‑step) when a long holder exercises:
1. Holder instructs broker to exercise (or the contract auto‑exercises if ITM at expiration).
2. Holder’s broker forwards an exercise notice to the OCC.
3. OCC allocates that exercise to one or more clearing members carrying short positions in that series.
4. The assigned clearing firm allocates to a specific client account per its allocation rules.
5. The assigned broker notifies the customer, posts margin adjustments, and arranges settlement (delivery or cash) on the normal settlement schedule.
Key assumptions and caveats
– Rules and timings described reflect U.S. listed options conventions (equity options, index options) and may vary internationally or by contract type.
– Brokers can enforce their own account policies (allocation methods, auto‑exercise thresholds, margin procedures). Always check your broker’s disclosures and options agreement.
– Taxes are jurisdiction‑dependent; the examples show basic mechanics but are not tax advice.
Useful references
Useful references
– Investopedia — Assignment (options): https://www.investopedia.com/terms/a/assignment.asp
– Options Clearing Corporation (OCC) — official site and resources on exercise/assignment: https://www.theocc.com/
– Cboe (Chicago Board Options Exchange) — Learn Center: Exercise & Assignment: https://www.cboe.com/learncenter/exercise_and_assignment/
– FINRA — Options: What Is an Option?: https://www.finra.org/investors/learn-to-invest/types-investments/options
– U.S. Securities and Exchange Commission (SEC) — Investor bulletin on options: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_options
Educational disclaimer
This information is educational only and not individualized investment advice. Always consult your broker, tax advisor, or other qualified professional before acting on options-related matters.