How Often Do Short Call Options Get Exercised Early? (2024)

Trading options has several advantages over buying and selling stocks. Investors that purchase options contracts gain the ability to profit from their predictions that a stock will increase or decrease in value without the risk – or the expense – of buying shares outright. Their maximum loss potential is the premium paid for the options contract.

Selling options contracts is a popular method of boosting income. Contract writers collect the premiums paid for the options, which they keep regardless of whether and how much the underlying stock price changes.

However, selling options can be a high-risk activity depending on the options strategy in use and the movement of the underlying stock price. For example, contract writers who bet that a stock price will drop can theoretically be on the hook for unlimited losses if the price of that stock suddenly shoots up.

Essentially, stock options give the buyer/owner of the contract the right, but not the obligation, to buy shares (call option) or sell shares (put option) at the price listed in the contract (strike price) before the contract reaches its expiration date.

Contract writers who sell call options, also referred to as shorting call options, must sell the underlying stock at the strike price if their contract is assigned. Contract writers who are short put options must buy the underlying stock at the strike price if their contract is assigned.

That obligation carries risk, particularly because it can come at any time during the life of the option. In most cases, contract holders have the right to exercise their options early, before the expiration date, which brings up the big question: how often do short call options get exercised early?

What Is Assignment?

The beauty of the stock market is that it creates a centralized trading system. Generally, individual buyers don’t have to find individual sellers for each transaction – and vice versa. The market brings buyers and sellers together in a way that smoothly matches shares for sale with those who wish to buy.

Options trading works the same way. Those who sell options contracts don’t have a one-to-one relationship with those who buy those contracts. However, that creates a conundrum when contract owners choose to exercise their options. Which contract writer is obligated to fulfill the obligations of the agreement?

The Options Clearing Corporation (OCC) has developed a process for ensuring the obligations are distributed fairly among options contract sellers.

Essentially, the OCC randomly “assigns” the requests from options contract owners to brokerage firms with accounts that hold a short position in that same option.

The brokerage firms have processes of their own for assigning the obligation to a specific client. Once assigned, that individual is required to sell the shares (for short call positions) or buy the shares (for short put positions).

How Often Do Short Call Options Get Exercised Early?

Though the options market is active, the number of options contracts that are actually exercised is quite small – approximately seven percent.

However, option sellers should not assume that only seven percent of their contracts will be assigned. There is a lot of chance involved in the assignment process, so individual contract writers might have all of their options assigned, none of their options assigned, or any figure in-between.

More importantly, unexpected events impacting the underlying company, the industry, or the larger market can create circ*mstances that make exercising certain options more lucrative – and that practically guarantees that most of the outstanding contracts will be exercised. With that said, short call options are rarely exercised early.

When Are Short Call Options Exercised Early?

Options fall into one of three categories: Out-Of-The-Money (OTM), At-The-Money (ATM), and In-The-Money (ITM).

When the price of the underlying stock is lower than the strike price of a call option or higher than the strike price of a put option, exercising the option would result in a loss. The option is said to be Out-Of-The-Money, which is to say that it is worthless. Traders with short options positions don’t have to worry their option will be assigned when it is OTM.

Options that are trading on the open market for the same amount as the options strike price are At-The-Money. There is no financial reason to exercise ATM options, so it is unlikely that these will be assigned.

The risk of assignment goes up when exercising the option would generate profit for the contract holder, even when the premium paid for the contract is included in the calculation. These options are said to be In-The-Money, and ITM options are at risk of being exercised.

It is most common for options to be exercised close to or on the expiration date, but American-style options can be exercised early. It doesn’t happen often, but certain intervening events can prompt investors who are long on calls or puts to go ahead with the transaction. For example, if trading of the underlying security is halted temporarily, it is still possible to exercise options for that security.

Other events that might prompt options owners to exercise their contracts include a substantial change in the price of the underlying security – the sort caused by particularly good or bad news for the industry or the company.

Merger and acquisition announcements may motivate investors to exercise options, as well as announcements of special dividends. Contract holders may wish to exercise their options in order to be shareholders of record as of the date specified for the dividend.

Exercising Short Call Options Early: The Bottom Line

When it comes to whether and how often short calls are exercised early, the bottom line is this: anyone with a short call option position should be prepared for the option to be assigned at any time. True, it is almost unheard of when the option is OTM or ATM, so the real risk comes when the option is ITM.

Generally speaking, short call options are exercised early when they are in the money and there is little or no extrinsic value (the difference between the contract’s intrinsic price and its market price) remaining. While not every option in this situation will be assigned, it is far more likely to happen when these circ*mstances occur.

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.