Exercise & Assignment
Exercise is the holder using the option's right; assignment is the OCC selecting a writer (by random allocation) to fulfill the obligation; American-style options exercise any time before expiration, European-style only at expiration.
The exam loves the directional pairing: a call holder exercises to BUY the stock at the strike, while a put holder exercises to SELL at the strike — and the assigned writer takes the mirror obligation (deliver or purchase the shares). Watch for the “tell” of a deep in-the-money call sitting just before an ex-dividend date; the high-yield answer is that early exercise becomes likely so the holder can capture the dividend — the classic reason American-style calls get exercised early rather than sold. Another favorite: only the long (holder) decides to exercise; the short writer never chooses.
Don’t confuse the random firm-to-firm assignment with how a firm then allocates internally — random, FIFO, or another equally random method that must be filed with and approved by FINRA, and disclosed to customers, so it can never be skewed to benefit the firm. Separately, the OCC’s guarantee role means it stands behind settlement, removing counterparty (writer-credit) risk. Hook: holders have rights, writers have obligations — and obligations don’t get to opt out.
PlayPrepHQ study notes are written and reviewed against primary exam sources. How we create & review content →