When does an option assignment actually get fulfilled?

Question

I had 2 iron butterflies in RSX, expiring Jan 20th 2020. My short legs were at $25 strike, and the long legs were at $22 and $26.

Over the weekend, I was notified that my short call ($25) was assigned, as RSX was trading at about $26 by close on Friday, Dec 20.

However, during Monday premarket, my broker showed that RSX had dropped and was able to buy RSX at $24.70, and my account balance had increased a few hundred dollars. It appears that I have no short position in RSX since I could afford the shares.

It looks like Monday is actually the ex-date for the dividend, so I imagine the buyer was trying to capture that.

Does this mean that the buyer wanted to buy RSX for $25 when that was a discount pre-dividend, but instead paid $25 when the actual cost was less?

If so, when does the assignment transaction actually happen, and how can the buyer be sure it's actually a good deal, since price could fluctuate? Or did both myself and the buyer profit in the scenario, since the lower price may only have affected me?

Answer 1

During any given trading day, options owners submit their exercise notices (in this case, Friday). In the evening, the OCC uses a "Wheel" to randomly determine who will be assigned and notifications are then sent to the brokers. These are received by traders early in the morning of the next trading day (you received your notice Monday AM that you went short on Friday).

The call owner made his decision on Friday when RSX was trading near $26. You bought the shares at $24.70 Monday morning to cover your short position. At the moment, your account is showing a gain due to this round trip transaction. I think that if you look a bit deeper, you're going to find that you owe the dividend to the lender of the shares (you were assigned Friday making you short the shares on the ex-div date which was Monday).

Since historical option prices are not available (your 1/20 $25 call), it's impossible for me to give you a precise answer. However, I can provide a generic explanation.

It's possible that the call owner exercised because he wanted the dividend. What's more likely is that due to the pending dividend, the bid price of your call was trading at less than intrinsic value (pending dividends increase put premium and decrease call premium). Some call owner decided to sell his call at a discount and that presented an immediate discount arbitrage to the market maker. He immediately exercised the call to lock in the discount and that resulted in your assignment.

To be clear, the dividend contributes to the reduced call premium but it is the actual discount that precipitates exercise/assignment