Assignment in Options

The Process to choose a buyer or a seller to honor the right of an Option contract is called Assignment.

We all know that buying or selling an Option gives you right to buy or sell at a predetermined time and at a predetermined price. An Assignment is a process wherein the buyer or seller of the Option contract exercises this right to buy or sell. The stock exchange uses a trading software to randomly pick a seller or buyer to honor the contract.

Suppose you have sold SBI call at strike price 360 with premium received of Rs 25. On expiration, the stock price of SBI moves stocks move up to  Rs 390. In such a case, some trader who has bought SBI call, realizing a profit from the trade, would choose to exercise his Option to buy. And, if the software chooses you to honor the contract then you have to bear the loss of Rs 30 (390-360) - Rs 25 = Rs 5 and honor the contract.

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