![]() After this, he must deliver it to the holder. If an investor does not own the stock, he must first buy it. The consequence of this is that upon assignment, the seller must purchase the security at the strike price. In this category, the holder has the right to sell to the security at the contract price. In this scenario, the seller’s obligation is to sell the option upon assignment. In a call option, the option holder possesses the right to buy the security before the contract expires. These categories and their respective merits become apparent as one learns to trade options. 2 Categories of Options to UnderstandĪs a brief summary, let’s go over the two basic categories of options. Due to the lottery-like nature of the process, it is almost impossible to predict when an investor’s option may be assigned. When a buyer exercises his option, the OCC will randomly connect them with a brokerage that is short on options of that equity. A trader will become more acquainted with the operations of the OCC as he or she learns to trade options. The assignment process is done at random by the Options Clearing Corporation (OCC). How Does the Option Assignment Process Work? It's important to also note that most options are exercised when they are nearing expiry because, after that, the options contract is worthless. In order to learn to trade options, it is necessary to grasp this structure of corresponding rights and duties. As a general rule, an option holder can exercise his rights any time before the contract expires. The seller accepts a responsibility to sell or buy the underlying security in lieu of a premium received from the buyer. As the trader is selling the option to open this position, he is technically said to be “short” that underlying stock. When an options seller writes an options contract, this is known as a “sell to open” trade, as he is essentially opening a new position. We recommend subscribing to one of Schaeffer's options trading newsletters to gain the ultimate insights into the language of the options market while making money, too. ![]() ![]() Once the holder decides to exercise the option, the option is said to be “assigned.” If a trader sells options, he must be aware of the assignment process and the risks it entails. An option holder has the right to buy or sell the underlying equity at the given strike price. One phrase that is a critical part of this options trading language is “assignment.” Simply defined, the assignment of an option refers to the fulfillment of the options contract by the seller. For a beginner who is aiming to learn how to trade options, understanding these technical terms is crucial to optimizing trading results. ![]() There is a lot of technical jargon that is specific to the options market. ![]()
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