Assignment often refers to two main definitions in the financial world:
- The transfer of an individual’s rights or property to another person or business, a concept prevalent in various business transactions and often explicitly outlined in contracts.
- In trading, assignment occurs when an option contract is exercised, obligating the option writer to fulfill the terms specified in the contract.
Key Takeaways
- Assignment involves the transfer of rights or property from one party to another.
- Options assignments take place when option holders exercise their rights to acquire or dispose of a security.
- Examples of assignments can be observed in wages, mortgages, and leases.
Unlocking the Potential of Assignments
Assignment pertains to the transfer of some or all property rights and obligations associated with an asset, property, contract, or other valuable entities through a written agreement.
Assignment rights are commonplace in numerous everyday scenarios. For instance, a payee (like a utility or merchant) may transfer the right to collect payment from a written check to a bank. A merchant might assign funds from a line of credit to a third-party manufacturer producing goods for future sale. Similarly, a homeowner selling their property will assign the deed to the new buyer.
For an assignment to be effective, it must involve legal capacity, consideration, consent, and legality of the object.
Real-World Examples of Assignment
Wage Assignment
A wage assignment is an automated method of fulfilling obligations by withholding from an employee’s pay. Courts may issue wage assignments for various obligations like overdue child support, taxes, or loans. Money is automatically deducted from the worker’s paycheck to satisfy the debt. For instance, if an individual owes $100 monthly in loan payments, a wage assignment ensures this amount is directly taken from their paycheck and sent to the lender. Wage assignments are particularly useful for repaying long-term debts.
Mortgage Assignment
In a mortgage assignment, a mortgage deed conveys a lender’s interest in a mortgaged property in exchange for received payments. Lenders might sell these mortgages to third parties, like other lenders. A mortgage assignment document outlines the transfer contract and guides the borrower on future payments, potentially modifying mortgage terms.
Lease Assignment
Lease assignment benefits tenants wishing to end a lease early or landlords seeking to ensure rent payments. Once a new tenant signs the lease, assuming responsibilities for rent and other obligations, the original tenant is freed from these duties. In another type of lease assignment, a landlord might agree to pay a creditor using rent due under property leases when defaulting on a loan or declaring bankruptcy. The rental income would then be directed to the lender.
The Process of Options Assignments
Options can be assigned when a buyer chooses to exercise their right to buy or sell stock at a specific strike price. The exact option seller matched to the exercising buyer is determined at the time of exercise via an automated lottery system. The selected seller then has to fulfill the buyer’s rights.
Once assigned, the option writer (seller) is obligated to sell (if it’s a call option) or buy (if it’s a put option) the specified number of shares at the agreed-upon strike price. For example, if an option writer sold calls, they must sell the stock at the strike price, an action often referred to as the stock being “called away.” With put options, the buyer sells the stock to the writer, placing the writer in a short-sold position.
Example
Imagine a trader owning 100 call options for ABC company’s stock with a $10 strike price. With the stock trading at $30 and an anticipated dividend, the trader exercises the options early, acquiring 10,000 shares of ABC at $10 each. Simultaneously, the counterparty (short call holder) is assigned the contract and must deliver the shares to the long position.
Related Terms: assignment of proceeds, trademark transfer, mortgage deed, loan default, put option, call option.
