16 Part I: Bask Properties ol Stock Options 
Example: The holder of an XYZ January 45 call option wishes to exercise his right to 
buy XYZ stock at $45 per share. He instructs his broker to do so. The broker then 
notifies the administrative section of the brokerage firm that handles such matters. 
The firm then notifies the OCC that they wish to exercise one contract of the XYZ 
January 45 call series. 
Now the OCC takes over the handling. OCC records indicate which member 
(brokerage) firms are short or which have written and not yet covered XYZ Jan 45 
calls. The OCC selects, at random, a member firm that is short at least one XYZ Jan 
45 call, and it notifies the short firm that it has been assigned. That firm must then 
deliver 100 shares of XYZ at $45 per share to the firm that exercised the option. The 
assigned firm, in tum, selects one of its customers who is short the XYZ January 45 
call. This selection for the assignment may be either: 
1. at random, 
2. on a first-in/first-out basis, or 
3. on any other basis that is fair, equitable, and approved by the appropriate 
exchange. 
The selection of the customer who is short the XYZ January 45 completes the 
exercise/assignment process. (If one is an option writer, he should obviously deter­
mine exactly how his brokerage firm assigns its option contracts.) 
HONORING THE ASSIGNMENT 
The assigned customer must deliver the stock - he has no other choice. It is too late 
to try buying the option back in the option market. He must, without fail, deliver 100 
shares of XYZ stock at $45 per share. The assigned writer does, however, have a 
choice as to how to fulfill the assignment. If he happens to be already long 100 shares 
of XYZ in his account, he merely delivers that 100 shares as fulfillment of the assign­
ment notice. Alternatively, he can go into the stock market and buy XYZ at the cur­
rent market price - presumably something higher than $45 - and then deliver the 
newly purchased stock as fulfillment. A third alternative is merely to notify his bro­
kerage firm that he wishes to go short XYZ stock and to ask them to deliver the 100 
shares of XYZ at 45 out of his short account. At times, borrowing stock to go short 
may not be possible, so this third alternative is not always available on every stock. 
Margin Requirements. If the assigned writer purchases stock to fulfill a 
contract, reduced margin requirements generally apply to the transaction, so 
that he would not have to fully margin the purchased stock merely for the pur­
pose of delivery. Generally, the customer only has to pay a day-trade margin of