Pricing & Mechanics
Assignment and Exercise
Also called: early assignment, automatic exercise, pin risk
Exercise is the option holder's right to buy (call) or sell (put) the underlying at the strike; assignment is the seller's matching obligation. US equity options are American style and can be exercised any time before expiration; options in the money by $0.01 or more are exercised automatically at expiration.
Early exercise is rare because it forfeits remaining extrinsic value, but it happens for deep in-the-money calls the day before an ex-dividend date (to capture the dividend) and for deep in-the-money puts when interest on the strike outweighs the remaining time value. Sellers of those options should expect assignment in those situations.
At expiration, holders can submit contrary instructions to prevent automatic exercise, and sellers can be assigned on any in-the-money short option. Pin risk is the uncertainty when the underlying closes within pennies of a short strike and after-hours moves decide whether assignment occurs.
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Frequently asked questions
Can I be assigned before expiration?
Yes, on any American-style short option, though it mostly happens on deep in-the-money positions, especially calls just before a dividend.
What is pin risk?
The risk that the underlying settles so close to your short strike that you do not know until after the close whether you will be assigned, leaving an unexpected stock position on Monday.