Exercise is when an option holder uses their right to buy (call) or sell (put) the underlying shares at the strike. Assignment is the flip side: the option seller is obligated to deliver. If you are long a call or put you bought, you control whether to exercise. If you sold one, you can be assigned.
When it happens
Most options are never exercised - traders close the position for cash instead. Exercise typically only makes sense at or near expiration, and mainly when the option is in the money. American-style options can be exercised any time before expiry; European-style only at expiry. Assignment risk for sellers rises as an option goes deep in the money and as expiration approaches, especially around dividends.
Why long buyers rarely worry
If you buy options and sell them to close before expiration - which is how most active traders operate - assignment is not your problem; it belongs to whoever sold. You simply capture the option's value in cash. The people who lose sleep over assignment are option sellers who leave short positions open into expiration.
Buy an option and close it for cash, and assignment is somebody else's problem.
The practical rule
Know your style. If you trade long options intraday or over a few days and flatten before expiry, exercise and assignment are edge cases. If you sell options, respect that assignment can arrive early and unannounced on in-the-money contracts - and never carry short in-the-money options into the final hours without a plan.
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