Exercise and Assignment in Options Trading

This blog post discusses the concept of exercise and assignment in options trading. It provides an example of how exercise and assignment work for a put option, and it discusses the implications of leverage when trading options.

What is exercise and assignment in options trading?

Exercise is when the buyer of an option chooses to exercise their right to buy or sell the underlying asset at the strike price. Assignment is when the seller of an option is obligated to fulfill their obligation to buy or sell the underlying asset at the strike price.

How does exercise and assignment work for a put option?

In the example provided, if the buyer of the put option exercises their option, they will sell 100 shares of AAPL at $120 per share. This will result in proceeds of $12,000. If the seller of the put option is assigned, they will be obligated to buy 100 shares of AAPL at $120 per share. This will result in a cost of $12,000.

What are the implications of leverage when trading options?

Leverage is the ability to control a large amount of an asset with a relatively small amount of capital. When trading options, leverage can be used to magnify both profits and losses.

For example, if you buy a put option with a strike price of $120 and the underlying asset price falls to $100, you will make a profit of $20 per share, or $2,000 for the entire option. However, if the underlying asset price rises to $140, you will lose the entire amount you paid for the option, which is $1,200.

Therefore, it is important to understand the risks of leverage before trading options.