A more advanced tutorial on the exact process that happens behind the scenes when an option contract gets assigned. From the exercise request to your broker and the OCC's handling of the assignment to the ultimate party who is given shares or stock. Our hope is that by understanding what happens and what parties are involved you'll feel more comfortable with the process should (and when) it happens to a position you are trading.
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In this video tutorial, we’re going to talk about the options assignment process. This is going to be specifically geared towards option writers and option sellers. Most people are really concerned about options assignment, their fear of options assignment big-time, but I’m going to tell you it’s not that hard of a process to go through.
I’ve been through it a lot of times myself, and you just want to know what's involved and what parties are involved and how everything works out. The good thing is that less than 10% of options are ever exercised and it usually happens the last week of trading, so that does help with just the numbers.
Most of your options, if you're short in options, are either going to expire, or somebody is going to close it out and reverse the order before expiration. But let’s talk about the option assignment process.
If you’ve watched any other videos, you can see that we’ve used this graph before, but we’re going to talk about this particular assignment process down here with the call writer. The process starts with an option buyer who sends an exercise notice to his broker.
The broker then sends that notice to the OCC. The OCC delivers shares to the broker and makes this guy whole. I’ve talked about this particular process up here in a different video tutorial under options exercise process.
What I want to specifically talk about here is what happens when you get assigned a contract. After all, this happens, the OCC now has an outstanding order for options exercise it has to deliver to somebody.
Somebody has to get the other end of this trade. What the OCC does is it randomly selects a member firm who is short and exercise call, so this could be your firm, it could not be your firm, it just randomly occurs.
Your broker then gets this notice from the OCC that they've been exercised on one of the contracts. Immediately before doing anything else, they want to make sure that they’re good and whole with the OCC, so they immediately deliver shares to the OCC, so that the OCC is virtually out of the picture at this point.
At that point, then they go through their internal process of determining who is going to get this exercise notice. If your broker happens to use a random basis, that means that any call writer or any call seller or any put seller or put writer is going to get randomly selected out of all the clientele who are short options.
Most firms go by the random process, but there are some firms who go by the first-in-first-out of FIFO basis meaning that the first people to trade those are the first also to get executed with any short exercise notice.
When you get assigned, basically what happens is that the broker delivers you the assignment notice and you have to come up with either the money or the shares to make good on that assignment or exercise notice.
Some brokers have different timelines for how long this can take. Most people will say that it can happen by the end of the day, so you’ll get assigned the day before and by the close of business the next day, you have to have either the cash value of those shares or the actual shares themselves delivered back to the broker.
If you’re short a call for example in this case, you either have to deliver shares in which case if you’re a covered call, you would just lose your shares that you already own if you wrote a covered call or you have to deliver the value to buy those shares in the open market which are another way that they can do it.
The options assignment process is not that complicated. It involves a couple of different key things. What I always tell people is that you want to make sure that you go directly to your broker and find out exactly what their process is, how long that they require for you to deliver the shares or the cash value and how long you have to actually go through this process.
A ny fees that might be involved in options assignment that you might not be aware of. It’s always important to understand who you’re dealing with and what the terms are before you start making any trades in the options market.
As always, I thank you guys for watching this video. And if you like the video, please use the social links right below here just to quickly share this video with any of your friends, family or colleagues on your favorite social network.