Options Expiration and Assignment: Exercise, Early Assignment, Pin Risk

At expiration, a US equity or ETF option is either exercised or expires worthless. Contracts that finish in the money by at least $0.01 are exercised automatically unless the holder instructs otherwise, and each exercise is matched by assignment to a seller. Because these options are American style, they can also be exercised before expiration, so sellers can be assigned early, for example just before an ex-dividend date.

When Do Options Expire?

Standard monthly equity and ETF options expire on the third Friday of the month. Many securities also list weekly expirations, and some of the most active ETFs list one every trading day. A Friday holiday normally moves expiration to the preceding business day. See 0DTE options.

What Happens At Expiration: Exercise By Exception

The Options Clearing Corporation (OCC), which clears listed US options, applies exercise by exception: an expiring equity option in the money by $0.01 or more at the close is exercised automatically. Holders can instruct otherwise, in either direction, up to the industry cut-off on expiration day (5:30 p.m. Eastern); brokers can set earlier deadlines.

Out-of-the-money contracts expire worthless. Every expiring contract, exercised or not, then drops out of open interest.

Physical Settlement

Standard equity and ETF options settle in shares, 100 per contract:

Call exercised: the holder buys 100 shares at the strike; the assigned seller sells them.
Put exercised: the holder sells 100 shares at the strike; the assigned seller buys them.

Illustrative example: a $50 call is exercised with the stock closing at $53. The holder pays $5,000 for 100 shares worth $5,300; the call's value at expiration was its intrinsic value, $300.

Many index options, such as those on the S&P 500 index, are instead European style and cash-settled.

How Assignment Works

When a holder exercises, the OCC assigns the exercise at random to a clearing firm with a short position in that contract. The firm allocates it to one of its customers' short positions, at random or by another fair method such as first in, first out. The seller is notified of the assignment by their broker.

Early Assignment Of American Options

American-style options can be exercised on any business day up to expiration. Exercising early forfeits the remaining extrinsic value, so in option-pricing theory it can be worth more than holding mainly in two situations:

Calls before an ex-dividend date: the dividend goes to shareholders, not call holders. When the coming dividend exceeds a call's remaining extrinsic value, exercising the day before the ex-dividend date can be worth more than holding the call. This applies mainly to deep in-the-money calls, whose remaining extrinsic value is small.
Deep in-the-money puts: exercising a put receives the strike in cash now rather than at expiration. When the interest on that cash outweighs the put's remaining extrinsic value, early exercise can be worth more than holding.

See intrinsic vs extrinsic value.

What Is Pin Risk?

Pin risk arises when the share price closes at or very near a strike on expiration day. Sellers cannot know whether holders will exercise, since holders can still decide after the close and after-hours moves can change that decision. An assigned seller may learn only the next morning of a new share position, and the price can move before the next session.

Expiration In Vyreon's Measures

Because expirations remove contracts from open interest whether or not anyone closed a position, Vyreon reports expired contracts separately in the change in open interest. Its exposure measures use contracts that expire after the session.

What Expiration Does Not Tell You

Who exercised, who was assigned, or why.
Where the price will settle. Max pain and strike concentrations are not price targets.

Sources

The Options Clearing Corporation (OCC), Characteristics and Risks of Standardized Options, the options disclosure document: expiration, exercise, assignment and settlement.
OCC Rule 805: exercise by exception for expiring options in the money by $0.01 or more.
FINRA Rule 2360(b)(23)(A): the 5:30 p.m. Eastern cut-off for exercise decisions on expiring options; see FINRA Information Notice, "Exercise Cut-Off Time for Expiring Options".
Robert C. Merton, "Theory of Rational Option Pricing", Bell Journal of Economics and Management Science (1973): early exercise of an American call is never optimal without dividends.
John C. Hull, Options, Futures, and Other Derivatives (Pearson, many editions): early exercise of American calls and puts.