The buyer would have no awareness of these events if they occur, because the problem is between tire violating seller and the system of broker, exchange, and the OCC. So orderly settlement ensures that everyone trading in options in good faith experiences a smooth, dependable system in which terms of the option contract are honored automatically and without fail.

When a buyer decides to exercise, 100 shares are either purchased from ("called from") or sold to ("put to") the option seller. When you have sold a call, exercise means your 100 shares could be called away and transferred to the buyer; and when you sell a put, exercise means that 100 shares of stock can be "put to" you upon exercise, meaning you are required to buy The entire process of calling and putting shares of stock upon exercise is broadly referred to as conversion. Stock is assigned at the time of exercise, a necessity because the number of buyers and sellers in a particular option will rarely, if ever, match. The assignment of an option's exercise, by definition, means that 100 shares of stock are called away.

Is exercise always seen as a negative to the seller? At first glance, it would appear that being exercised is undesirable, and it often is seen that way; many sellers take steps to minimize the risk of exercise or to avoid it altogether. However, the question really depends upon the seller's intentions at the time he or she entered the short position. For example, a seller might recognize that being exercised at a specific price is desirable, and will be willing to take exercise with the benefit of also keeping the premium as a profit.

Tip: Some sellers enter into a short position in the hopes that exercise will occur, recognizing that the combination of capital gain on the stock and option premium represents a worthwhile profit.

It is logical that most sellers will close out their short positions or pick options the least likely to be exercised. Sellers have to be aware that exercise is one possible outcome and that it can occur at any time that the option is in the money. The majority of exercise actions are most likely to occur at or near expiration, so the risk of early exercise is minimal, although it can and does occur.