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Let's say I own a share of a company at $100, and I sell a call option for this company for $5 with a 6 month expiration, and a strike price of $110 (all arbitrary numbers). If the share price rises to $120 and the option is exercised, will my share automatically be sold to the owner of the option? How does this transaction play out?

If I bought the stock and sold the call option through an online broker, would the broker automatically sell my share of the company? Or would the broker automatically try to buy a share at market and then sell it?

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    Are you asking if options are cash-settled or physically settled, or if your share will be sold directly to the option holder? – D Stanley Jun 8 '18 at 13:16
  • I'm asking if it will be cash-settled or physically settled automatically by an online broker. :) – fileyfood500 Jun 8 '18 at 16:05
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    The OCC uses a "wheel" nightly to determine who will be assigned after they receive exercise notices from brokers. They then notify brokers whose investors have the short option positions. The broker may have their own criteria for assignments. If your number comes up, your broker removes the shares from your account and credits the proceeds (less commission, if any) to your account. The only time this may be a problem for the investor is if the underlying is close to the strike at expiration (pin risk) and isn't sure whether assignment will occur. – Bob Baerker Jun 8 '18 at 16:31
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Equity options are American style so the owner of a call has the right to exercise it at any time. If the stock rises significantly above $110, you may be assigned early and your shares will be sold. This is somewhat more likely if there is a pending dividend and the ITM short call has no time premium remaining.

The Options Clearing Corporation will automatically exercise any option that is $0.01 or more in-the-money at expiration ("exercise by exception") unless the owner designates to his broker that he does not want his long option exercised. This might occur if a call is barely ITM and the salvageable time premium is less than the commission (this does not apply to your example).

With your stock at $120 at expiration, kiss it good-bye and the following Monday, you will have $110 per share in your account (you received the $5 premium when you sold the covered call).

  • So to clarify, the stock will be sold automatically? – fileyfood500 Jun 8 '18 at 16:06
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    The Options Clearing Corporation will automatically exercise any option that is $0.01 or more in-the-money at expiration (and the stock will be sold). – Bob Baerker Jun 8 '18 at 16:23

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