When an option seller is required to fulfill the contract: deliver shares on a short call or buy shares on a short put.
Assignment happens when the holder exercises. American-style equity options can be assigned any time before expiration, most often when the option is deep in-the-money or the day before an ex-dividend date. in-the-money short options are almost always assigned at expiration.
Being assigned is not a disaster if you were covered-call or cash-secured-put and expected it. It is a problem if a spread leg is assigned and the other leg leaves you with an unintended stock position over a weekend.
Example: you sold a $50 put. The stock closes at $47 on expiration Friday. Over the weekend, 100 shares appear in your account at $50 each, costing $5,000.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
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