Assignment
The process by which an option seller is required to fulfil their obligation — delivering or buying the underlying — when the buyer exercises.
Assignment occurs when an option holder exercises their contract and the Options Clearing Corporation (OCC) randomly assigns the obligation to a counterparty who is short that option. The assigned seller must buy (if short a put) or sell (if short a call) the underlying at the strike price.
Early assignment risk is real for American-style options that are in the money, particularly calls on dividend-paying stocks the day before ex-dividend. Traders short calls should monitor ex-div dates carefully.
On the desk
You sold a MSFT $420 put. MSFT drops to $410 and the put holder exercises. You are assigned — forced to buy 100 shares at $420, a $1,000 loss relative to market value.