Options are contracts, so eventually someone may use one. Two words describe that moment: exercise and assignment.
Exercise (the buyer’s move)
To exercise is to use your right:
- Exercise a call → you buy the shares at the strike.
- Exercise a put → you sell the shares at the strike.
In practice, most traders sell the option to close instead of exercising — it’s usually simpler and captures any remaining extrinsic value. You mainly exercise when it’s clearly worthwhile (deep in the money, near expiry).
Assignment (the seller’s obligation)
Assignment is the flip side: when a buyer exercises, a seller is chosen to fulfil the contract.
- A short call assigned → you must deliver shares at the strike.
- A short put assigned → you must buy shares at the strike.
You don’t choose to be assigned — it’s allocated to sellers, often when an option is in the money near expiry (or before a dividend).
American vs European
- American-style options (most US stocks) can be exercised any time before expiry — so assignment can happen early.
- European-style options (most index options) can only be exercised at expiry — no early surprises.
Settlement
When the dust settles, contracts resolve either by:
- Physical settlement — actual shares change hands (typical for stock options), or
- Cash settlement — the difference is paid in cash (typical for index options).
The practical takeaway
If you buy options, exercise is your choice and rarely necessary. If you sell options, know that assignment can come at you — especially in the money near expiry. Manage short positions before they get there and there are no nasty surprises.