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This is how Assignment and Exercise of Option Works

Let’s say trader Joe buys AAPL June 90 calls and AAPL is trading at $93.50. When AAPL is trading at $93.50 trader Joe wishes to exercise his right to buy the call at $90 (his strike price) per share.

Trader Joe will inform his broker ‘A’ that he wishes to exercise his right to buy AAPL shares at $90 per share.

Broker ‘A’ will then instruct his administrative personnel to handle the exercise for trader Joe.

The administrative personnel will contact Options Clearing Corporation that they wish to exercise one contract of June 90 call.

Options Clearing Corporation then checks their records to see which brokerage firms are short the June 90 call and has not covered their positions.

Options Clearing Corporation then randomly selects one brokerage firm (let’s say broker ‘B’) that is short at least one contract of June 90 call.

Options Clearing Corporation then notifies broker ‘B’ that they are assigned one June 90 call contract.

Broker ‘B’ then must deliver 100 shares of AAPL at $90 per share to broker ‘A’ that exercised the option.

Broker ‘B’ then randomly selects one of his customers who are short June 90 calls of AAPL and informs his customer that he has been assigned June 90 call of AAPL and must deliver 100 shares of AAPL.

This completes the process of exercise or assignment.

However, the trader who must deliver 100 shares of AAPL must either have 100 shares in his account or he has to buy 100 shares of AAPL at then prevailing price which would be above $90 per share. If he does not have AAPL shares in his account and does not want to buy AAPL shares at the prevailing price then he will instruct his broker that he wishes to go short on AAPL. The broker ‘B’ then either deliver 100 shares of AAPL from his inventory or borrows 100 shares of AAPL from other brokers. However, if AAPL shares are not available to be short (borrowed) then the customer has to buy 100 shares of AAPL from the market at that current price and deliver.

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