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"Will Options Be Automatically Assigned Once Strike Price Is Hit?"

Question By Tony

"Will Options Be Automatically Assigned Once Strike Price Is Hit?"

If your option strike price is hit but the option is two month out can you be forced to buy the stock or pay off that option (assigned) at that time?

Asked on 28 Jan 2014

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Answered by Mr. OppiE

Hi Tony,

To rephrase your question, you are wondering if your options would be automatically assigned once its strike price is reached even though there is still time left to expiration.

The short answer is: No

At least not the very moment your strike price is reached. If options get automatically assigned once strike price is reached, won't it be impossible to buy in the money or at the money options? As such, if you are buying out of the money options and the underlying stock is going the direction of your expectation, you can continue to hold and profit from the move even though strike price is reached and exceeded (getting in the money) and sell them anytime you wish to take profit.

However, even though your options will not be automatically assigned the very moment its strike price is reached, it does not mean that remaining in the money won't eventually get your options assigned. There are two scenarios in which your in the money options (this only happens if your options are in the money) will become assigned:

1. When it is in the money during expiration. All in the money options will be automatically exercised on expiration. This is however, not the case in your question.

2. Random early assignment prior to expiration. All in the money options are subject to the random possibility of being exercised early prior to their expiration. Generally, the nearer to expiration and the deeper in the money, the higher the chance of a "random" assignment. Please read more about Early Assignment.

In conclusion, options are not necessarily exercised automatically the moment their strike price is reached. However, the random chance of it being assigned does exist anytime before expiration as long as you are holding an in the money option.

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