Options Trading Options Exercise and Assignment 1 — Questions and Answers
Question 1: When an option holder exercises their right, what does the option writer (seller) experience?
- They receive an additional premium payment
- They are assigned and must fulfill the contract obligation (Correct answer)
- Their position automatically expires worthless
- They receive the underlying shares at market price
Correct answer: They are assigned and must fulfill the contract obligation
When an option holder exercises, the writer is assigned and must fulfill their contractual obligation — delivering shares for calls or buying shares for puts.
Question 2: Which type of option can be exercised at any time before or on the expiration date?
- European-style options
- Bermudan-style options
- Asian-style options
- American-style options (Correct answer)
Correct answer: American-style options
American-style options can be exercised at any point before or on the expiration date, unlike European-style options which are restricted to expiration day only.
Question 3: What happens to the premium collected by a call option seller if the buyer exercises the option?
- The premium is returned to the buyer upon exercise
- The seller must pay double the premium as a penalty
- The premium is kept by the seller regardless of exercise (Correct answer)
- The premium is applied as a credit toward the strike price
Correct answer: The premium is kept by the seller regardless of exercise
The premium collected by the option seller is always theirs to keep, regardless of whether the option is exercised, expires worthless, or is closed early.
Question 4: If you hold a covered call position and the short call is assigned, what happens to your shares?
- You receive additional shares at the strike price
- Your shares are called away and sold at the strike price (Correct answer)
- You must buy more shares at the current market price
- The position automatically rolls to the next expiration cycle
Correct answer: Your shares are called away and sold at the strike price
When a covered call is assigned, the seller must deliver 100 shares at the strike price — the shares are effectively sold (called away) at that price.
Question 5: On what date(s) can a European-style option be exercised?
- Any trading day during the option's life
- Only during the last week before expiration
- Only on the expiration date itself (Correct answer)
- Only during the first month after purchase
Correct answer: Only on the expiration date itself
European-style options can only be exercised on the expiration date, giving the holder significantly less flexibility compared to American-style options.
Question 6: How many shares of the underlying stock does one standard equity options contract represent?
- 10 shares
- 50 shares
- 1,000 shares
- 100 shares (Correct answer)
Correct answer: 100 shares
One standard equity options contract controls 100 shares of the underlying stock, which is why options premiums are multiplied by 100 to get total cost.
Question 7: When a put option holder exercises their right, what obligation does the put writer face?
- Sell 100 shares at the current market price
- Buy 100 shares from the put holder at the strike price (Correct answer)
- Deliver 100 shares to the put holder at the strike price
- Pay cash equal to the option's intrinsic value
Correct answer: Buy 100 shares from the put holder at the strike price
When a put is exercised, the put writer must purchase 100 shares at the strike price from the put holder, who has exercised their right to sell.
Options Trading Options Exercise and Assignment 1
When an option holder exercises their right, what does the option writer (seller) experience?