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.
Physical vs. Cash Settlement Options
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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American vs. European Style Options
It is important to understand the difference between American & European-style options. American-style options contracts can be exercised any day on or before the expiration date. European-style options contracts can only be exercised on the expiration date and cannot be assigned early to the option seller. Most index options are European-style options.

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