Topics Options

Explained: Options Cash Settlement vs. Physical Settlement

Beginner
Options
2024年1月1日

Key Takeaways:

  • Depending upon the contract, traders can choose to settle either physically or via cash. 

  • A physical settlement options contract is exercised when the asset is exchanged for the strike price given in a contract. 

  • A cash settlement option involves the exchange of the cash value of the assets, paid to the buyer.

Cash Settlement

A cash-settled options contract is a procedure of settlement in which the contract is settled by the cash equivalent of the underlying asset upon execution if the contract is in its favor. The settlement doesn’t change hands when the option is exercised. 

For example, Sandra closes her call options (BTC-USDC) position in a cash equivalent settlement that allows her to buy 10 BTC at a strike price of $30,000. The market price is $31,000, so instead of receiving a credit of $10,000 as gross profit ($31,000 − $30,000 × 10), she’s credited with the amount of USDC in profit, which is $10,000 equivalent of USDC. 

Physical Settlement

Physically settled contracts use the underlying asset to execute the contract. For example, when Sarah executes a call option for XYZ contract with a strike price of $30,000, which is physically settled, she’s exercising the right to buy at $31,000. As a Call option buyer, she buys XYZ at $30,000. 

Summary

Cash settlement options don’t involve any exchange of assets when the contract is exercised, relying instead upon the difference between the strike price and the current price to be paid to the buyer. However, a physical settlement option causes a change of assets based on the predefined strike price in an option contract.