- Exercise is the term used when the owner (i.e. someone who has a long position in a call or put) uses his right to buy (in the case of a call) or sell (in the case of a put) the stock.
- Assignment is the term used when someone who is forced to sell (in the case of the call) or buy (in the case of a put) the stock.
Remember, for every option trade there is a buyer and a seller, so if you are short an option, there is someone out there who is long that option and who could exercise.
Major Key thing to remember is that, on expiration, brokerage firms will automatically exercise any equity option that is $0.01 or more in-the-money.
Options exercise takes place officially on Saturday night.
What this means is that your options will be converted into shares and you will become a proud stock owner!
You can be potentially obligated to outlay a lot of money to buy stock. Specifically, trading 10 contracts (1 contract is worth 100 underlying shares of stock). So you would be obligated to buy 10 x 100 = 1,000 at (the strike price).
That comes out to a whopping outlay of cash!
Major Key: Close them out.
