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Market Intelligence › Basic Terminologies
The buyer's right, the seller's obligation, and the rule of automatic exercise
Published by The Retail Trader · AUG 02, 2026 · Derivatives (F&O)
An option buyer holds a right and the seller holds an obligation. When that right is used at expiry, it is called exercise for the buyer and assignment for the seller.
In India, in the money options are exercised automatically at expiry. The buyer does not have to do anything, which is why even a buyer who forgets ends up in settlement.
For the seller, assignment is by random allocation. Having sold an option means you are ready for that obligation, even though which day it arrives is not in your hands.
This matters most in three situations:
• In stock options, exercise means a delivery obligation, not cash.
• On a very slightly in the money option, settlement charges can be bigger than the profit.
• In a spread strategy, if one leg is exercised and the other is not, the risk suddenly opens up.
• So leaving a spread unattended at expiry is not safe.
The thinking at expiry that "the position will settle by itself" runs comfortably only in index options. In stock derivatives, that same thinking can turn into a large delivery obligation, for which you never budgeted the money.
This article is for education only — it is not a buy or sell recommendation, makes no claim of a guaranteed return, and is not advisory. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or the official source.