All listed options contracts have an expiration date. Specified in each contract, the expiration date is the date up through which the contract is valid. Before or on expiration, known as “expiry,” an option holder can exercise their right to buy or sell the underlying asset controlled by the options contract.

There are two options styles: American and European. Despite their names, the styles have nothing to do with geographic location; they instead determine when an option contract holder can exercise their right to buy or sell the underlying asset.

A European-style contract can only be exercised on the day of expiration. Examples of European-style options include most index options. Alternatively, an American-style contract can be exercised at any time before or on the contract’s expiration. Most US-listed equity and ETF options are American-style. Regardless of style, an option contract ceases to exist after its expiration date.

The expiration date is a key factor to keep in mind when trading options, especially if you are selling American-style options, which, as we mentioned, can be exercised by a buyer at any time. When an option is exercised by the buyer or holder, the process known as assignment begins for eligible sellers. If assigned, the option seller must either buy the underlying asset (if they sold a put) or sell the underlying asset (if they sold a call).

Another consideration is an option’s price sensitivity as it approaches expiration. Typically, an option’s value decreases as the expiration date approaches. This “time-decay” represents the decreasing probability of the contract being in-the-money, or having value, at expiration.

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Early Exercise & Assignment Risk

Listed stock options are American-style options. As a buyer of the stock option, you can exercise your option any time on or before the contract’s expiration date. Early exercise of options is generally related to dividends. For instance, short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned.

Should you decide to exercise early, the seller of the option may face the risk of assignment. Assignment is the organized process conducted by the Options Clearing Corporation (OCC) that randomly matches buyers who exercise options to the sellers that sold them. If assigned, the option seller is obliged to deliver shares to the buyer. The seller would no longer be eligible to collect the dividend payment for those shares. If the seller doesn’t own the shares at assignment, the seller must acquire shares in the market at whatever price they are trading at.

Index options do not have early assignment risk because they are typically European-style options – they cannot be exercised before their expiration date. Additionally, index options settle into cash instead of shares at expiration, so again, there is no risk of assignment when trading an index option.

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Disclaimer: Cboe and Webull are separate and unaffiliated companies. This content is provided by Cboe and does not reflect the official policy or position of Webull. This content is for educational purposes only and is not investment advice or a recommendation or solicitation to buy or sell securities.

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