Options Trading Options Exercise and Assignment 3

Question 1

What is the most direct way for an option seller to eliminate their assignment risk before expiration?

Accepted Answer

Buy back (close) the short option position in the market

Answer

File a formal objection notice with the OCC before the market opens

Answer

Request a margin extension from their broker to cover the obligation

Answer

Write another option at a higher strike to hedge the exposure

Question 2

What is a 'cash-settled' option exercise, as seen with most index options?

Accepted Answer

The option holder receives cash equal to the intrinsic value instead of shares upon exercise

Answer

The option seller pays a cash penalty to avoid having to deliver shares

Answer

The option premium is paid in installments over the life of the contract

Answer

The broker automatically liquidates shares to cover any assignment costs

Question 3

Which scenario would most likely trigger early exercise of a call option?

Accepted Answer

A deep in-the-money call one day before a large ex-dividend date when the dividend exceeds time value

Answer

An out-of-the-money call with 60 days to expiration and rising implied volatility

Answer

A deep in-the-money call with substantial remaining time value and no upcoming dividend

Answer

An at-the-money call with high theta decay and 5 days to expiration

Question 4

When does stock assignment resulting from automatic exercise at expiration typically appear in a trader's account?

Accepted Answer

At the opening of the next trading day after expiration

Answer

Immediately when the option goes in-the-money at expiration

Answer

Simultaneously with the expiration settlement on the same day

Answer

Within three full trading days after the expiration date

Question 5

What is the primary risk of holding a short option position through expiration when the underlying stock is near the strike price?

Accepted Answer

Unexpected assignment due to after-hours price moves crossing the strike

Answer

Vega risk from sudden implied volatility changes during the final hour

Answer

Weekend gap risk if expiration falls on a Friday and markets reopen Monday

Answer

Theta decay causing the option to lose value faster than anticipated

Question 6

If you are assigned on a naked (uncovered) short call and do not own the underlying shares, what position does your account now hold?

Accepted Answer

Short 100 shares of the underlying stock

Answer

Long 100 shares at the strike price

Answer

A synthetic long position

Answer

A cash-secured obligation to buy shares

Question 7

What approach best helps an options seller avoid unwanted assignment while still generating premium income?

Accepted Answer

Sell only out-of-the-money options and close the position before it moves in-the-money

Answer

Always sell at-the-money options for maximum premium collection

Answer

Never close short positions early — always let them expire to maximize theta decay

Answer

Sell options with the longest possible expiration dates to give more room