Options Exercise, Assignment, and More: A Beginner’s Guide to Options Expiration

Learn about options exercise and options assignment before taking a position, not afterward. This guide can help you navigate the dynamics of options expiration.

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5 min read
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Key Takeaways

  • Learn the basics of options exercise and options assignment
  • Understand the difference between in-the-money and out-of-the-money options
  • The surest way to avoid exercise or assignment is to liquidate or roll a position ahead of expiration, but remember, assignment of a short option can happen at any time 

So your trading account has gotten options approval and you recently made that first trade—say, a long call in XYZ with a strike price of $105. Then the option expires, and at the time, XYZ is trading at $105.30.

Wait. The stock’s above the strike. Is that in the money (ITM) or out of the money (OTM)? Do I need to do something? Do I have enough money in my account? Help!

Please, please, please: Don’t be that trader. The time to learn the mechanics of options expiration is before you make your first trade. Opening an account at TD Ameritrade entitles you to a host of free trading education, including an entire course on options trading. (And at the end of this article, you’ll find a short video covering the basics.)

Here’s a guide to help you navigate options exercise and assignment — along with a few other basics.

Memorize This Table (or Cut It Out and Paste It to Your Screen)

The buyer (“owner”) of an option has the right, but not the obligation, to exercise the option on or before expiration. A call option gives the owner the right to buy the underlying security; a put option gives the owner the right to sell the underlying security.

Conversely, when you sell an option, you may be assigned the underlying asset—at any time regardless of the ITM amount—if the option owner chooses to exercise. The option seller has no control over assignment and no certainty as to when it could happen.

An option will likely be exercised if it’s in the option owner’s best interest to do so, meaning if it’s advantageous from a price standpoint for the owner to take or to close a position in the underlying security at the strike price rather than at the prevailing price in the open market. After the close on expiration day, ITM options may be automatically exercised, whereas OTM options are not and typically expire worthless (often referred to as being “abandoned”). The table below spells it out.

If the underlying stock price is... ... higher than the strike price ... lower than the strike price
A long call is ... … ITM and typically exercised ... OTM and typically abandoned
A short call is ... ... ITM and typically assigned ... OTM and typically abandoned
A long put is ... ... OTM and typically abandoned … ITM and typically exercised
A short put is ... ... OTM and typically abandoned ... ITM and typically assigned

This assumes a position is held all the way through expiration. Of course, you typically don’t need to do that. And in many cases, the usual strategy is to close out a position ahead of the expiration date. We’ll revisit the close-or-hold decision in the next section and look at ways to do that. But assuming you do carry the options position until the end, there are a few things you need to consider:

  • Know your specs.Each standard equity options contract controls 100 shares of the underlying stock. That’s pretty straightforward. Non-standard options may have different deliverables. Non-standard options can represent a different number of shares, shares of stock of more than one company, or underlying shares and cash. Other products—such as equity index options or options on futures—have different contract specs.
  • Offsetting positions will match and close.Suppose you’re long 300 shares of XYZ and short one ITM call that’s assigned. That call is deliverable into 100 shares, so you’ll be left with 200 shares of XYZ if the option is assigned.

Exercise and Assignment: It’s Not Just at Expiration!

Standard U.S. equity options are American-style options, meaning they can be exercised anytime before expiration. If you’re short an option that’s deep ITM, it’s possible you’ll get assigned early. ITM short call positions are particularly vulnerable if a company is about to issue a dividend. (Learn more about options and dividend risk.)

  • It’s automatic, for the most part. If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, there’s something called a Do Not Exercise request that a long option holder can submit if they want to abandon an option. In such a case, it’s possible that a short ITM position might not be assigned. For more, see the note below on pin risk, or refer to this advanced options expiration article
  • You’d better have enough cash. If an XYZ option is exercised or assigned and you don’t have an offsetting position, you’ll essentially be exchanging an options position for a position in the underlying. A long call or a short put will result in a long position in XYZ; a short call or a long put will result in a short position in XYZ. For long stock positions, you need to have enough cash to cover the purchase or else you’ll be issued a margin call, which you must meet by adding funds to your account. But that timeline may be short, and the broker, at its discretion, has the right to liquidate positions in order to meet a margin call. If exercise or assignment involves taking a short stock position, you need a margin account and sufficient funds in the account to cover the margin requirement.
  • Short equity positions are risky business. An uncovered short call or a long put, if assigned or exercised, will result in a short position. If you’re short a stock, you have potentially unlimited risk because there’s no limit to the price increase of a security. There’s also no guarantee the brokerage firm can continue to maintain that short position for an unlimited time period. So if you’re a newbie, it’s generally inadvisable to carry a position into expiration if there’s a chance you might end up with a short stock position.   

A note on pin risk: It’s rare, but occasionally a stock settles right on a strike price at expiration. So if you were short the 105 calls and XYZ settled at exactly $105, there would be no automatic assignment, but depending on the actions taken by the option holder, you may or may not be assigned—and you may not be able to trade out of any unwanted positions until the next business day.

But it goes beyond the exact price issue. What if an option is ITM as of the market close, but news comes out after the close (but before the exercise decision deadline) that sends the stock up or down through the strike price? Remember: The holder of the option could submit a Do Not Exercise request. 

This uncertainty and potential exposure is called pin risk, and the best way to avoid it is to close your position before expiration.

The Decision Tree: How to Approach Expiration

As expiration approaches, you have three choices. Depending on the circumstances—and your objectives and risk tolerance—any of these might be the best decision for you. 

Let the chips fall where they may. Some positions may not require as much maintenance. An options position that’s deeply OTM will likely go away on its own, but occasionally an option that’s been left for dead springs back to life. If it’s a long option, that might feel like a windfall; if it’s a short option that could’ve been closed out for a penny or two, you might be kicking yourself for not doing so.

Conversely, you might have a covered call against long stock, and the strike price was your exit target. For example, if you bought XYZ at $100 and sold the 110-strike call against it, and XYZ rallies to $113, you might be content with the $10 profit (plus the premium you took in when you sold the call, but minus any transaction costs). In that case, you can let assignment happen.

Close it out. If you’ve met your objectives for a trade—for better or worse—it might be time to close it out. Otherwise, you might be exposed to risks that aren’t commensurate with any added return potential (like the short option that could’ve been closed out for next to nothing, then suddenly came back into play).

The close-it-out category also includes ITM options that could result in an unwanted position or the calling away of a stock you didn’t want to part with. And remember to watch the dividend calendar. If you’re short a call option near the ex-dividend date of a stock, the position might be a candidate for early exercise. If so, you may want to consider getting out of the position well in advance—perhaps a week or more. Keep in mind, there is no guarantee that there will be an active market for an options contract, so it is possible to end up stuck and unable to close an options position.        

Roll it to something else. This is the third choice. Rolling is essentially two trades executed as a spread. One leg closes out the existing option; the other leg initiates a new position. For example, suppose you’re short a covered XYZ call at the July 105 strike, the stock is at $103, and the call’s about to expire. You could roll it to the August 105 strike. Or, if your strategy is to sell a call that’s $5 OTM, you might roll to the August 108 call. Keep in mind that rolling strategies can entail additional transaction costs, including multiple contract fees, which may impact any potential return. 

The Bottom Line on Options Expiration

You don’t enter an intersection and then check to see if it’s clear. You don’t jump out of an airplane and then test the rip cord. So do yourself a favor. Get comfortable with the mechanics of options expiration before you make your first trade. Your beating heart will thank you. 

Doug Ashburn is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.

Key Takeaways

  • Learn the basics of options exercise and options assignment
  • Understand the difference between in-the-money and out-of-the-money options
  • The surest way to avoid exercise or assignment is to liquidate or roll a position ahead of expiration, but remember, assignment of a short option can happen at any time 

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Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels. Margin is not available in all account types. Margin trading privileges subject to TD Ameritrade review and approval. Carefully review the Margin Handbook and Margin Disclosure Document for more details. Please see our website or contact TD Ameritrade at 800-669-3900 for copies.

The risk of loss on an uncovered call options position is potentially unlimited since there is no limit to the price increase of the underlying security. The naked put strategy includes a high risk of purchasing the corresponding stock at the strike price when the market price of the stock will likely be lower. Naked options strategies involve the highest amount of risk and are only appropriate for traders with the highest risk tolerance. 

Spreads and other multiple-leg options strategies can entail additional transaction costs which may impact any potential return. These are advanced options strategies and often involve greater risk, and more complex risk, than basic options trades.

Please note that the examples above do not account for transaction costs or dividends. Options orders placed online at TD Ameritrade carry a $0.65 fee per contract. Orders placed by other means will have additional transaction costs.


Market volatility, volume, and system availability may delay account access and trade executions.

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