Settlement Type
The option contract specifies the manner in which the contract is to be settled.
- Physical settlement - Physically settled options require the actual delivery of the underlying security. An example of a physically settled contract is U.S.-listed exchange-traded equity options.
- Cash settlement - Cash-settled options do not require the actual delivery of the underlier. Instead, the market value, at the exercise date, of the underlier is compared to the strike price, and the difference (if in a favourable direction) is paid by the option seller to the owner of the option. An example of a cash-settled contract is most U.S.-listed exchange-traded index options.
Read more about this topic: Exercise (options)
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