Early Exercise (assignment)

Early exercise happens when the owner of an option chooses to use their contract's right — to buy or sell the underlying stock — before the contract's expiration date, instead of waiting until expiration. When this happens, the person who sold (wrote) that option gets "assigned," meaning they are now obligated to fulfill the other side of the trade: if a call is exercised early, the assigned seller must deliver shares at the strike price; if a put is exercised early, the assigned seller must buy shares at the strike price.

This is only possible with American-style options, which can be exercised on any trading day up to expiration. European-style options can only be exercised at expiration, so early exercise doesn't apply to them. Most single stock options traded by retail traders in the US are American-style, while many index options are European-style.

Early exercise is uncommon because it usually throws away value. An option's price is made up of intrinsic value (what it's worth if exercised right now) plus time value (the extra premium reflecting the chance the option becomes more profitable before expiration). Exercising early captures only the intrinsic value and forfeits the remaining time value, so most option holders sell the contract instead if they want to close the position profitably. The two situations where early exercise happens more often are around dividends — a call holder may exercise just before a stock goes ex-dividend to capture the payout — and when an option is deep in the money with very little time value left, making the remaining time value negligible.

The tricky part for beginners is that assignment can happen to you at any time you're short an option, even overnight, and you often find out the next morning rather than in real time. This means a trader who sold an option can suddenly wake up holding (or having sold) 100 shares of stock per contract they didn't plan to actively trade.