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

Buying back (closing) the short option position is the most direct and reliable way to eliminate assignment risk entirely, since you no longer hold the obligation.

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

Cash-settled options (common with index options like SPX and NDX) settle in cash for the difference between the strike and the settlement value, with no actual stock delivery occurring.

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

Early call exercise is most rational when the stock is deep in-the-money and the upcoming dividend exceeds the option's remaining time value, making it economically superior to hold the stock.

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

Stock resulting from automatic exercise at expiration is typically processed overnight and reflected in the trader's account the next trading day following expiration.

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

When a stock is near the strike at expiration, after-hours price movement can push the option in-the-money, triggering unexpected assignment that the trader cannot respond to until the next trading day.

Options Trading Practice Test

Options Trading Practice Test

Options Trading Options Exercise and Assignment 3