Assignment of Option: When a buyer selects to exercise his option, then who should be
asked to honor the contract?
In European options,
All options are exercised on last day of option. Hence Buyers and Sellers are matched and there is no question of assignment.
In American options,
Here Buyers can exercise option anytime during life of option. Now who from the Sellers, should be asked to honor the contract. Some Exchanges follow random assignment while some Exchanges follow First In First out Principle (FIFO).
SETTLEMENTS OF OPTIONS:
1. Some contracts are delivery based option contracts, which result in delivery after exercising of contract.
2. Some contracts are non- delivery based. These are cash settled i.e. that settlement takes place only in cash, by squaring up your position with spot price at the expiry.
