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Dear Steve,

I'm a relative newcomer to options, and I'd like to clarify something about selling calls. Let's say XYZ is trading at $100 a share. The September 100 calls are $3.30. If I sold 10 call contracts at $3.30, would the stock have to rise above $103.30 for me to get called out? Is there a rule of thumb in terms of at what profit point the buyer of the options would call me out? I'm curious to the motivation of the call buyer. Is this person merely wanting to sell the option at a profit or do they really want the underlying? Or is there no rhyme or reason? --Rob S.

First, let's deal with the concept of exercise and assignment. An exercise is an option buyers' right, in the case of calls, to take delivery or buy the underlying shares at a specified (strike) price; a put owner can exercise his right to sell shares of the underlying at specified price.

An assignment, on the other hand, refers to an option sellers' obligation to either deliver (calls) or purchase (puts) shares at the specified price.

Most equity and Exchange Traded Fund options are American style, meaning they can be exercised any business day before expiration. Some events that might prompt an early exercise of an American option include a halt of trading on news, impending merger or takeover, or an approaching ex-dividend date. Index options have a European style, meaning they can only be exercised on the day of expiration.

Before addressing exercise strategies, let's take a peak behind the scenes at some of the rules governing exercise and assignment. Options Clearing Corp., (whose

Web site provides a wealth of information) exercises "by exception," which means, unless specifically instructed otherwise, it will automatically exercise in-the-money options. The OCC employs auto-exercise price thresholds: Equity options that are 75 cents or more in the money in customer accounts will be exercised, as will options that are 25 cents or more for firm or market maker accounts. For index options, the thresholds are 25 cents for customers and a penny for firm or market-maker accounts.

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On the assignment (option sellers) side of the equation, the OCC uses a random procedure to assign exercise notices to the accounts maintained with OCC by each clearing member firm. The assigned firm must then use an exchange-approved method (usually a random process or the "first-in, first-out" method) to allocate those notices to accounts which are short the options.

Keeping these thresholds in mind, in Rob's example, he would be definitely be assigned (calling his stock away) if XYZ shares closed above $100.75 on expiration day. In reality, most options that are 25 cents in the money are exercised by the holder. The OCC rules are simply a procedure to protect holders from losing intrinsic value in case they the fail or forget to exercise.

The $103.30 that Rob refers to is actually the break-even point on that call at that price. It has nothing to do with whether he'll be assigned; though the fact that it's $3.30 in the money pretty much guarantees it will be.

The random-assignment process means the person who bought the options you sold isn't likely to be the one assigning you. The price at which you sell an option has no bearing on whether it will be assigned -- an exercise is strictly a function of strike price relative to the price of the underlying.

There are no rules of thumb about why or how someone makes decision to buy or sell a particular option at a given price, except the certainty that they're trying to make money.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

Steve Smith.