Types of Settlement
Physical Settlement
When an option that is physically settled is exercised, the option holder buys (with call options) or sells (with put options) the underlying asset from the option writer at the strike price. With physical settlement the underlying asset or security actually changes hands, and a payment (in the amount of the strike price) for the asset is also exchanged.
Some examples of physically settled options are: stock options, currency options, bond options, commodity options, and futures options.
Cash Settlement
When a cash settled option is exercised the option holder will receive a cash payment which is determined by a formula. The formula for determining the settlement of an index call option is:
Exercise-settlement amount = (Closing index level on day of exercise - Strike price) x Multiplier x # of contracts.Some examples of cash settled options are: index options, interest rate options, and swaptions.
| Settlement Type * | |
|---|---|
|
Physical |
Cash |
|
Stock
Options |
Index
Options |
|
Commodity
Options |
Interest Rate
Options |
|
Bond
Options |
Swaptions |
|
Currency
Options |
3-D Currency
Options |
|
Futures
Options |
|
| * This table shows the typical type of settlement of several types of options, however there are some exceptions. For contract specifications visit the "products" link on the options exchange the contract trades on. | |
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