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Interactive Options Course
Lesson 5 of 7
There are two styles of options, European and American. The difference between the two is that European style options cannot be exercised early while American style options can. In this lesson, we will go over the exercise and assignment process and possible reasons why an investor may exercise an option early and the risks associated with getting assigned early.
The holder of the option has the right to exercise or convert the option into the underlying. For an equity call option, the holder will receive 100 shares of the stock at the strike price if they exercise and the holder of a put option will sell 100 shares of stock at the strike price if they exercise. Conversely the seller of the call option will have to sell 100 shares of stock at the strike price if they are assigned and the seller of the put option must buy the stock at the strike price if they are assigned.
For example, ABC stock is trading at $100 at expiration. An investor who bought an ABC 90 call can exercise the call and pay $90 for ABC stock even though it is trading at $100. An investor who sold an ABC 90 call will be assigned and must sell 100 shares at $90.
Remember, the holder or buyer of the option has all the rights, and the seller or writer has all the obligations. If ABC stock is trading at $100 at expiration an investor who bought an ABC 90 put would let it lapse or not exercise since they would end up selling 100 shares of ABC at $90 when they could sell the 100 shares at $100 in the market.
Options that are in-the-money at expiration will be automatically exercised, this is also known as exercise by exception, unless specifically instructed by the holder not to do so. This procedure will automatically exercise in-the-money options to protect the holder from losing the intrinsic value of the option. The Option Clearing Corporation, OCC, uses a $0.01 threshold but it is possible that the investor’s clearing and/or brokerage firm may use a different value, so it is important that the investor checks with them.
For exchange traded options in the U.S. the OCC plays an important role in the exercise and assignment process. They are the intermediary between buyers and sellers, and they issue and guarantee all option contracts. When an option is exercised, the option holders trading or brokerage firm notifies their clearing firm, and the clearing firm notifies the OCC. The OCC then notifies the writer’s clearing firm, which notifies the seller’s trading or brokerage firm and then the seller is assigned the appropriate contra underlying position to the holder.
The assignment process is random, so the buyer and seller involved with the original option transaction usually don’t exchange the underlying if the option is exercised but will transact with another investor instead via the OCC.
Pin risk applies to sellers of options when the underlying closes at its strike price on expiration. Going back to our ABC stock example, in this scenario the investor sold 10 ABC 90 calls and ABC stock closed at $90 on expiration. The investor does not know whether they will be assigned all 10 calls, zero calls, or some number in between and must guess on the number of shares that they may be short after expiration. Pin risk makes it extremely hard for the investor to hedge their option position and they will know how many shares of the underlying they are long or short until they are notified of the amount of shares they are assigned.
As discussed earlier in this lesson there are two types of options: American style and European style, the ability to exercise early only applies to American style options. An investor may want to exercise an option early for a few reasons. For calls, the underlying may be going ex-dividend, and the investor wants to convert the option to the underlying to receive payment or the stock may become hard to borrow and the investor may want to cover a short position to avoid paying high borrow fees. An investor may exercise puts to take advantage of interest rates.
Brokers will have daily cut-off times to submit early exercises so an investor should contact their broker for the proper procedure.
An investor who has short options may find themselves unexpectedly assigned prior to expiration. This is one of the risks that investors who sell options face. The investor should pay attention to upcoming corporate actions, borrowing fees, and interest rates as part of their risk management strategy and be aware of the potential to be assigned early on their short-option positions.
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The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options by going to the following link ibkr.com/occ. Multiple leg strategies, including spreads, will incur multiple transaction costs.
I had bought put options that were assigned at expiration. Why was this assigned when I did not exercise? How to prevent this, other than closing my position early? I was always under the impression that when you buy an option you don’t have an obligation!!! Very upset with your auto assignment
Hello Sivaram, thank you for reaching out. For a time-sensitive trading issue, please contact Client Services via phone: https://spr.ly/IBKR_ClientServicesCampus
Hi. Automatic exercise means that the value of my options get turned into the same amount of cash or you exercise on my behalf and receive the underlying stock or index? And if the second do you have to maintain some level of cash to be able to trigger the exercise? What happens if you don’t hold any cash? Thank you.
Hello James, thank you for reaching out. You may use the FYI Automatic Actions tool to automatically exercise US dividend-related stock and ETF options. Once configured, IBKR’s system will determine whether an early exercise of call options may be beneficial. The system will send a notification two days before the stock trades ex-dividend and if the determination remains favorable, automatically exercise the option early. Please review this FAQ for instructions to configure the tool: https://www.interactivebrokers.com/faq?id=27284073
Please review this FAQ for more information about if you are unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment: https://www.interactivebrokers.com/faq?id=37138025
We hope this helps answer your question.
I was assigned a short option even though at close of the underlying it was out of the money and only move itm after hours.
Hello, thank you for contacting us. Our AI-powered “Get Help” functionality may be of assistance to you. ibkr.com/help
If you continue to experience difficulties, please create a web ticket using the link below so our support team can assist you promptly: https://spr.ly/IBKR_TicketCampus
Hi. If my Option expired In-The-Money, how can i choose not to Exercise? I can’t find the function within the desktop version of TWS. Also, what is the cut of time of “Do Not Exercise” instruction for CME Index Option?
Hello, thank you for reaching out. In the case of U.S. securities options, the OCC will automatically exercise any option that is in-the-money by at least $0.01 unless you provide contrary exercise instructions. For non-U.S. options, please refer to the Options Exercise page of our website for information on how the different clearinghouses will handle the exercise: https://www.interactivebrokers.com/en/trading/delivery-exercise-actions.php
You can review more details here: https://www.ibkr.com/faq?id=52483599
Hello What happens if I enter a Short Iron Condor when max loss is capped at less of my account balance but potential assignment of stock would exceed account balance?
Hi- is there a clear answer to this? Thanks
Hi William, IBKR does not provide investment advice.
Hi, what happens if I, as a put seller, get assigned shares (traded in USD) for lets say 50,000 USD when I hold 30,000 EUR and 30,000 USD in my account, both in cash. Will this trigger an automated currency conversion or what happens?
Hello, thank you for reaching out. When you’re assigned shares from a put option in a different currency than some of your cash holdings, here’s what happens with your account at Interactive Brokers.
If you’re assigned shares traded in USD for $50,000 while holding €30,000 and $30,000 in cash:
Your available USD cash ($30,000) will be used first
The remaining obligation ($20,000) will create a negative USD balance
Your EUR cash remains untouched and separate
No automatic currency conversion occurs
We maintain “currency segregation,” meaning each currency in your account is treated separately. This gives you control over when and if to convert currencies.
Once assignment creates a negative USD balance, you can:
Convert currencies manually through the Convert Currency tool in your account dashboard
Keep the negative USD balance as a margin loan (interest charges will apply)
Sell some of the assigned shares to reduce or eliminate the negative balance
The negative balance will be subject to margin interest charges, and your account must maintain sufficient overall equity to meet margin requirements.
Please reach back out with any additional questions. We hope this helps!
Are you permitted to sell call options?
Hello, thank you for asking. Yes, with the proper trading permissions it is possible to sell a call option at IBKR. You can easily view and manage your trading permissions any time in Client Portal:
https://spr.ly/IBKR_TradingPermissions
For more information about Options levels 1-4, visit ibkr.info/node/4860
You can learn more about how to sell a call in our Introduction to Options course: https://www.interactivebrokers.com/campus/trading-lessons/introduction-to-options-2/
Hi so am I correct in thinking per some of the above conversations that while IBKR advises that the account holder needs to monitor account equity re potential short option assignment. In reality, if the account holder does not have sufficient equity to take ownership of stock assignment from a short position- that IBKR will liquidate the assigned stock position if assignment occurs. This is an automatic process…correct?
Hello, thank you for reaching out. Please view this FAQ for more information on What happens if I am unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment?https://www.interactivebrokers.com/faq?id=37138025
We hope this helps!
Hello- just checking answer re above question… ‘What happens if I enter a Short Iron Condor when max loss is capped at less of my account balance but potential assignment of stock would exceed account balance?’ From what I have read, IBKR will liquidate the position. So if my account can handle the max loss on a spread but not the assignment of the stock in dollar terms- IBKR has an automatic process to deal with this. As opposed to asking the account holder to find additional funds for the contract(s) the account can’t handle. Is this correct?
Hi William, thank you for reaching out. You should review your positions prior to expiration to determine whether you have adequate equity in your account to exercise your options. You should also determine whether you have adequate equity in the account if an in-the-money short option position is assigned to your account. You should also be aware that short options positions may be exercised against you by the long holder even if the option is out-of-the-money.
If you anticipate that you will be unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment, you should either close positions or deposit additional funds to your account to meet the anticipated post-delivery margin requirement.
IBKR reserves the right to prohibit the exercise of stock options and/or close short options if the effect of the exercise/assignment would be to place the account in margin deficit. To protect against these scenarios as expiration nears, IBKR will simulate the effect of expiration assuming plausible underlying price scenarios and evaluating the exposure of each account assuming stock delivery. If the exposure is deemed excessive, IBKR reserves the right to either:
Liquidate options prior to expiration. Please note: While IBKR retains the right to liquidate at any time in such situations, liquidations involving US security positions will typically begin at approximately 9:40 AM ET as of the business day following expiration;
Allow the options to lapse; and/or
Allow delivery and liquidate the underlying at any time.
In addition, the account may be restricted from opening new positions to prevent an increase in exposure. IBKR determines the number of contracts that will be lapsed by IBKR/auto-exercised shortly after the end of trading on the date of expiration. The effect of any after hours trading you conduct on that day may not be taken into account in this exposure calculation.
While IBKR reserves the right to take these actions, account holders are solely responsible for managing the exercise/assignment risks associated with the positions in their accounts. IBKR is under no obligation to manage such risks for you. Please view this FAQ for more information: https://www.interactivebrokers.com/faq?id=37138025
We hope this helps!
If I bought a put option. During expiry if it is ITM, I have no underlying shares but I have enough money. Will it be auto assigned and converted into cash?
Hi Jon, thank you for asking. Please view what happens at expiration if your long put option is in the money here: https://www.interactivebrokers.com/faq?id=40341891
We hope this helps answer your question!
What happens at expiration if my short call option is in-the-money? Do i need to cover the call option myself? Or it will be handled by IBKR? thanks
Hi, thank you for asking. For more information on what happens at expiration to your short option, please view: https://www.interactivebrokers.com/faq?id=51676494
We hope this helps!
hi, i am a call-option seller, if it is ITM and i dont have underlying. What would happen if i didnt close it manually? will IBKR automatic help me to close the option at option expiration date?
Hello, thank you for asking. If you take no action on expiring options, those that are in-the-money (ITM) by a clearinghouse-defined specific amount will automatically be exercised. For example, options traded on US exchanges that are cleared through the Options Clearing Corporation (OCC) will be automatically exercised if they are $0.01 or more ITM, while those trading on Eurex and cleared through Eurex Clearing AG (ECC) must be more than 10 basis points ITM to be automatically exercised.
Use the Option Exercise tool to manually manage your options, for example to exercise an option early, exercise an OTM option, or allow an ITM option to lapse.
Find out more about the criteria for Option Exercise, including the deadline for manual exercise/lapse requests and how deeply in-the-money options must be to trigger automatic exercise, in the Options Exercise section of the Delivery, Exercise and Corporate Actions web page.
Options involve risk and are not suitable for all investors. For more information read the “Characteristics and Risks of Standardized Options” that you can find on the OCC website. Please view this FAQ for more information: https://www.interactivebrokers.com/faq?id=335229930
We hope this helps!
I’m trying to close a position early on calls I bought. However, every time I click close position on the app, it behaves as though I am selling a naked call and shows my max loss as infinite. What is the way to close position on options in the app?
I want to know, if I hold a call option and it is OTM at maturity, will the system help me automatically expire? Because I forgot
In a cash account, if I already have 100 shares of a stock trading at $28 and a $38 put option and decide to exercise it early, then IB will take the 100 shares and pay into the account the strike of $38 x 100, that’s completely understandable. My question is why does IB perform a currency translation to SELL $5913 USD and then immediately buy $5574 USD with a notice saying there was a ‘negative cash position’? What negative cash position, the shares completely covers the exercised put, there should be no reason to perform a currency translation at all. Can someone explain this please?
Hello, thank you for reaching out. To address your concern/inquiry, we need a few more details about the situation and your account; unfortunately, IBKR Campus is not a secure channel to share this information. We kindly ask that you contact our Client Services team for further assistance via web ticket using the link below. https://spr.ly/IBKR_TicketCampus
We appreciate your understanding.
Let’s assume that I have bought a put @$0.7 with a strike at $20 and at the day of expiration the put’s value has dropped at $0.02. The market price at that date, is $20.25 and it is highly probable to end up ITM if it continues further down to $20 or below. In case that i do not wish to automatically exercise the option, what choices do i have? Is there a way to declare not to exercise the option?