How options work: calls, puts, exercise, assignment and the risks of 0DTE

An option is a contract that gives its buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price (the strike) until or on a set date (the expiration). A call is the right to buy; a put is the right to sell. The buyer pays a price for that right, the premium, and the seller (the writer) takes on the obligation to buy or sell if the buyer exercises.

This guide explains how US listed options work, how exercise and assignment run through the clearing house, and the risks FINRA flags in same-day (0DTE) options. It does not recommend any strategy, broker or product.

Calls, puts, premium and strike

FINRA’s options rule, Rule 2360, defines a call as a contract under which the holder has the right to purchase the underlying security, or to receive a cash amount based on the settlement value of an underlying index, security or metric. A put is the mirror image: the right to sell the underlying, or to receive a cash amount. The premium is the price agreed between buyer and writer.

The two sides carry different risks:

The buyer pays the premium up front. The most the buyer can lose is that premium. If the option is not worth exercising at expiration, it expires and the premium is gone.
The writer receives the premium and accepts an obligation. A call writer must sell at the strike if assigned; a put writer must buy at the strike. FINRA warns that uncovered call writers, who sell calls without owning the underlying, face the risk of unlimited potential loss if the underlying rises sharply.

For US stock options, FINRA’s rule treats one contract as covering 100 shares. An option is in the money when exercising it has value: for a call, when the underlying trades above the strike; for a put, when it trades below.

Example, with hypothetical numbers: a stock trades at $50. A trader buys one call with a $55 strike, expiring in a month, for a premium of $2, paying $200. If the stock is at $54 or lower at expiration, the call expires worthless; the buyer loses $200 and the writer keeps it. If the stock is at $60, the call is worth $5 a share, or $500, and the buyer is $300 ahead after the premium. For a writer who did not own the shares, $60 means buying 100 shares at $60 to deliver them at $55: a $500 loss, or $300 after the premium. At $70 the same writer’s loss would be $1,300 after the premium, and nothing in the contract caps it.

American-style and European-style

American-style options can be exercised at any time before expiration. FINRA says options on US stocks and exchange-traded funds are American-style.
European-style options can be exercised only at expiration. Cboe’s specifications for S&P 500 Index options (SPX) say they are European-style and settled in cash, with a multiplier of $100.

Cboe’s comparison table shows why this matters: SPY, the ETF that tracks the S&P 500, is American-style and settled in shares, while SPX and its weekly versions are European-style and settled in cash.

Exercise, assignment and the OCC

US listed options are cleared through the Options Clearing Corporation (OCC). In an October 2026 order, the SEC describes OCC as the central counterparty for the listed options markets in the United States: it interposes itself as the buyer to every seller and the seller to every buyer, and is obligated to perform on the contracts it clears.

When a holder exercises, the chain runs like this:

The holder tells their broker. Under FINRA Rule 2360, only the clearing firm carrying the account can send the exercise notice to OCC, and firms may set their own, earlier, deadlines for customer instructions.
OCC assigns the exercise to a firm with a short position in that series. FINRA explains that OCC has an established process to assign exercise notices randomly.
The firm passes the assignment to one of its customers who is short the same series. Rule 2360 requires firms to use either a “first in, first out” method or a random selection method approved by FINRA, and to tell customers in writing which method they use.

Early assignment

Because stock and ETF options are American-style, a writer can be assigned on any day the market is open while the short position stays open, not only at expiration. FINRA notes that most American-style exercises happen on or near expiration, and that only about 7% of options positions are typically exercised. That figure does not limit any one writer’s risk: FINRA says investors may have some, all or none of their short positions assigned.

FINRA gives two reasons a holder might exercise early: a significant price move in the underlying, or shares becoming hard to borrow ahead of a corporate action such as a takeover.

Assignment can also break a spread. In FINRA’s example, a trader is short one put and long a higher-strike put, both out of the money at the close on expiration day. News after the bell sends the stock sharply lower, the short put is assigned, and unless the trader also exercises the long put, its protection is lost.

Expiration day

On expiration day, expiring stock and ETF options go through OCC’s exercise-by-exception procedure under OCC Rule 805: unless the holder gives contrary instructions, options that are in the money by specified amounts are exercised automatically. Rule 2360 gives holders until 5:30 p.m. Eastern Time on the business day of expiration to make a final decision, and firms may not accept instructions after that. Cboe notes that American-style options may be exercised after the close even if they finished out of the money.

0DTE options: what they are and why volume grew

Cboe defines 0DTE options as options contracts that expire at the end of the current trading day. They are not a separate product: a 0DTE trade opens a position on a contract’s expiration day, even if that contract was listed weeks or months earlier.

FINRA says the strategy has become more common in recent years as expirations in certain options have expanded to practically every day of the week. Cboe’s specifications list S&P 500 Weeklys (SPXW) with settlement dates on Monday, Tuesday, Wednesday, Thursday and Friday, alongside the traditional third-Friday contracts.

In its review of 2025, published on 22 January 2026, Cboe reported that 0DTE SPX options averaged 2.3 million contracts a day, or 59% of the product’s total volume. Across all US listed options, Cboe said 2025 was the sixth consecutive record year, with daily trading averaging 61 million contracts.

FINRA lists the appeal for retail traders: quick outcomes, money tied up for a short time, and lower premiums, which make 0DTE options a cheaper way to take a position on short-term volatility.

The risks FINRA flags in 0DTE

FINRA’s investor insight on 0DTE, dated 4 June 2026, sets out the risks plainly:

Speed works both ways. Any strategy that can earn profits quickly can bring losses quickly, and 0DTE options are very sensitive to changes in the price of the underlying. Cboe adds that near-the-money options are extremely sensitive as expiration approaches.
Buyers can lose the whole premium. The option has a lifetime of one day, and a low price does not change that.
Sellers face the largest losses. Uncovered call writers face the risk of unlimited loss if the underlying rises sharply.
Your broker may close the position for you. Before the close, a firm may check whether an option could finish in the money. For physically settled options, which include most options on stocks, it may liquidate the position if you lack the cash or shares to meet the obligation on exercise. FINRA warns that this can limit profits or cause losses, especially for a trade opened shortly before the firm decides. Cash-settled options, such as index options, may be less likely to be liquidated this way.

Margin rules apply too. FINRA has replaced the “pattern day trader” rules and their $25,000 minimum with intraday margin requirements, effective 4 June 2026, with a transition period for firms until 20 October 2027. FINRA says the new requirements will typically cover margin used for trading 0DTE options. Your firm may still apply the old rules during the transition. Repeatedly failing to meet intraday margin deficits promptly can lead to an account being restricted for up to 90 days. Our guide to margin calls explains how forced closures work more generally.

What to check before you trade options

Account approval and the disclosure document. Rule 2360 bars a firm from accepting an options order until it has given you the options disclosure document, Characteristics and Risks of Standardized Options, and approved your account after checking your financial situation and objectives. Writers of uncovered options receive an additional written statement on the risks.
Style and settlement. Find out whether the contract is American or European style, and whether it settles in shares or cash.
Your firm’s rules. Ask for its exercise deadline, its assignment allocation method and its policy on closing positions near expiration.
What you could owe. For any short option, work out the cost of buying or delivering the shares if you are assigned.

The SEC’s introduction to options has more worked examples, and our guide to how futures contracts work covers the other main listed derivative.

Frequently asked questions

Can I lose more than the premium on an option? Not as a buyer: a bought option can expire worthless, which costs the whole premium and no more. A writer can lose far more than the premium received, and FINRA says the potential loss on an uncovered call is unlimited.

What is early assignment? It is assignment before expiration, after the holder of an American-style option exercises early. Options on US stocks and ETFs are American-style, so a writer can be assigned on any trading day.

Who decides which writer is assigned? OCC assigns exercise notices randomly to clearing firms with short positions in that series. Each firm then allocates them to its customers on a first in, first out or random basis, and must tell customers which method it uses.

Will my broker close my options before expiration? It may. FINRA says firms may liquidate physically settled options near the close if you lack the cash or shares to meet the obligation, at a price that can limit profits or cause losses.