A newcomer to the options
world received an exercise notice from her broker and wanted to know how that
was possible when expiration was still three days away.
For those who don’t
understand the exercise/assignment process, here’s a brief outline:
1. An option owner
may exercise an American style option at any time before it expires.
a. All options on
individual stocks are American style.
b. Some index
options are European style and may not be exercised before expiration.
2. When an option owner
exercises an option, his or her broker notifies the Options Clearing
3. The OCC randomly
chooses a clearing member (such as a broker) and assigns an exercise notice to
4. Each broker has
its own methodology for choosing which of its customer accounts receives that
exercise notice. To be eligible to
receive an assignment notice, the account must have a short position in that
specific option. The assigned firm must
use an exchange-approved method (either a random process or the "first-in,
first-out" method) to allocate those notices.
It’s not a conspiracy. The process is fair to all parties.