Physical vs. Cash Settlement Options
It is important to understand the difference between physical and cash settled options. Physical settlement of an options contract is the most common, and involves the actual delivery of the underlying security, like shares of stock. Cash settlement occurs when cash exchanges hands at settlement instead of an underlying security or physical commodity.
Kirk Du Plessis
Apr 19, 2021
The difference between physical and cash settled options is quite easy to understand and very important, depending on the types of securities you are trading (like index options for example). Physically settled options are contracts whereby the settlement requires actual delivery of the underlying stock like GOOG or AAPL shares. Cash settled options are contracts whereby the settlement does not require the actual underlying security but rather the cash value of the options at the time of expiration. These would be mostly the indexes, like SPX and RUT.
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