What does "assignment risk" mean in options trading?

In options trading, "assignment risk" specifically refers to the possibility of being required to fulfill the obligations of an options contract, typically when holding a short position in options. When a trader sells or writes an option, they assume the obligation to either sell or buy the underlying asset if the option is exercised by the holder. This means that if the option is exercised, the seller must take the necessary action, which can lead to financial consequences based on the current market price of the underlying asset.

Assignment risk is particularly significant for sellers of options and can take the form of unexpected obligations that might arise if the option is exercised, impacting their investment strategy and financial position. Understanding this risk is crucial for anyone involved in options trading, as it influences how traders manage their portfolios and hedge against potential losses.

The other options describe different concepts related to trading and investing, but they do not encapsulate the specific meaning of assignment risk as it pertains directly to the obligations imposed by options contracts.