Assignment Risk
The risk that a short option seller is assigned and obligated to buy or deliver shares — critical for stock options on NSE under physical settlement.
Definition
Assignment risk is the probability that a trader who has sold (written) an option contract will be assigned — that is, legally obligated to fulfil the contract because the option buyer exercises their right. When a short call is assigned, the writer must sell the underlying shares at the strike price. When a short put is assigned, the writer must buy shares at the strike price. Assignment is not a choice — once the buyer exercises, the exchange randomly selects a seller's account to bear the obligation. In India, physical settlement rules introduced by SEBI in 2019 made assignment risk a practical reality for stock option writers on NSE and BSE, where all equity derivatives now settle by delivery of shares rather than cash.
Why it matters
Assignment risk is asymmetric: the option buyer controls when (and whether) to exercise; the seller has no say once the exercise notice is submitted. For Indian stock option writers, the consequences can be severe if they lack the shares (for a short call) or the cash (for a short put) to meet the delivery obligation. NSE imposes a delivery margin from four trading sessions before expiry on in-the-money stock option positions — this extra margin can catch traders off-guard if they are not monitoring ITM positions. Index options (Nifty, BankNifty, FinNifty, MidcpNifty, Sensex, Bankex) are European-style and cash-settled, so assignment during the life of the contract is impossible — the only assignment-like event is auto-settlement at expiry for ITM positions, which is cash-based and automatic. Stock options, however, are technically American-style (exercisable at any time) which means early assignment is possible, though rare, when the option has little or no time value — for example, a deep ITM call just before the ex-dividend date.
How it works
When a buyer exercises, the exchange's clearing corporation (NSCCL on NSE) runs a random matching process to select a writer from all accounts holding short positions in that contract. The probability of being assigned on any given day is proportional to your share of total open short interest. If assigned on a short call, you must deliver shares at the strike price — if you don't own them, you must buy them at the current market price, which may be higher, resulting in an automatic loss. If assigned on a short put, you must pay cash equal to (strike price × lot size) to buy shares at the strike, even if the market price is now lower. Brokers typically square off physically-settled positions in the last two sessions before expiry if clients lack sufficient shares or cash to meet delivery.
Example
Suppose you sold a Reliance Industries 3,000 call expiring at the end of the month, collecting ₹50 per share. The lot size is 250. Reliance rallies to ₹3,200 by Thursday and the option is deep ITM. If the buyer exercises (or if it is not squared off by your broker before expiry), you are obligated to sell 250 shares of Reliance at ₹3,000. If you don't hold the shares, you must deliver by purchasing at ₹3,200 — a loss of ₹200 per share (₹50,000 total), minus the ₹50 premium received = net loss of ₹37,500. This is the physical delivery risk that makes deep ITM short stock option positions dangerous. With a do-not-exercise instruction, some buyers with small intrinsic-value positions choose not to exercise, but writers cannot rely on this.
Watch for ITM stock option positions
Use TradePulse to monitor open interest changes and option moneyness on your short stock option positions heading into expiry week.