18 Part I: Basic Properties of Stock Options 
bring greater potential to a portfolio. Or if the customer is already short the XYZ 
stock, he is going to have to buy 100 shares and pay the commissions sooner or later 
in any case; so exercising the call at the lower stock price of 45 may be more desir­
able than buying at the current price of 55. 
ANTICIPATING ASSIGNMENT 
The writer of a call often prefers to buy the option back in the secondary market, 
rather than fulfill the obligation via a stock transaction. It should be strJssed again that 
once the writer receives an assignment notice, it is too late to attempt to buy back 
(cover) the call. The writer must buy before assignment, or live up to the terms upon 
assignment. The writer who is aware of the circumstances that generally cause the 
holders to exercise can anticipate assignment with a fair amount of certainty. In antic­
ipation of the assignment, the writer can then close the contract in the secondary mar­
ket. As long as the writer covers the position at any time during a trading day, he can­
not be assigned on that option. Assignment notices are determined on open positions 
as of the close of trading each day. The crucial question then becomes, "How can the 
writer anticipate assignment?" Several circumstances signal assignments: 
1. a call that is in-the-money at expiration, 
2. an option trading at a discount prior to expiration, or 
3. the underlying stock paying a large dividend and about to go ex-dividend. 
Automatic Exercise. Assignment is all but certain if the option is in-the­
money at expiration. Should the stock close even a half-point above the striking 
price on the last day of trading, the holder will exercise to take advantage of the 
half-point rather than let the option expire. Assignment is nearly inevitable even 
if a call is only a few cents in-the-money at expiration. In fact, even if the call 
trades in-the-money at any time during the last trading day, assignment may be 
forthcoming. Even if a holder forgets that he owns an option and fails to exer­
cise, the OCC automatically exercises any call that is ¾-point in-the-money at 
expiration, unless the individual brokerage firm whose customer is long the call 
gives specific instructions not to exercise. This automatic exercise mechanism 
ensures that no investor throws away money through carelessness. 
Example: XYZ closes at 51 on the third Friday of January (the last day of trading for 
the January option series). Since options don't expire until Saturday, the next day, the 
OCC and all brokerage firms have the opportunity to review their records to issue 
assignments and exercises and to see if any options could have been profitably exer-