Assignment
Assignment in options is the process by which an option writer (seller) is notified that the buyer has exercised their option, obligating the writer to fulfil the contract — delivering or receiving the underlying asset at the agreed strike price.
Assignment was the mechanism through which an options contract moved from a paper obligation to an actual transaction. When a call option was assigned, the call writer was required to deliver the underlying shares (in the case of stock options) or settle the cash difference (in the case of index options) at the strike price, regardless of where the underlying was trading in the open market. When a put was assigned, the put writer was required to purchase the underlying at the strike price, even if the market price was significantly lower.
In India, index options — which constituted the overwhelming majority of F&O trading volume on NSE — were cash-settled. This meant that assignment on an in-the-money index option at expiry resulted in a cash debit to the writer equal to the intrinsic value of the option (the difference between the settlement price and the strike price, multiplied by the lot size). Stock options, following SEBI's directive for physical settlement that was implemented in phases between 2018 and 2020, required actual delivery of shares in the case of assignment.
The physical settlement regime introduced significant operational complexity for stock option writers. A trader who wrote call options and was assigned needed to deliver shares by T+2. Failure to do so resulted in the exchange sourcing shares through the auction market, and any shortfall penalty — which could range from 0.5 to 1 percent of the value per day, plus auction premium — was debited to the writer's account. Writers who did not hold the underlying shares had to arrange delivery from the open market, which exposed them to a liquidity crunch if the stock was thinly traded.
American-style versus European-style exercise terms determined when assignment could occur. On NSE, all equity and index options were European-style, meaning exercise and assignment happened only at expiry and not before. This was a critical distinction for traders familiar with US markets, where American-style options could be assigned at any point during the contract's life, requiring more active monitoring of ITM written positions.
A common misconception among novice option writers was that assignment only occurred at expiry. For European-style options on NSE, this was largely accurate — early assignment did not apply. However, for F&O positions rolled over across expiry dates, the question of potential assignment at the near-month expiry required careful attention, particularly for in-the-money stock options where physical delivery obligations were at play.