Physical Settlement
Physical settlement occurs when an option contract is settled through the actual exchange of the underlying asset.
For example, if a call option is exercised, the buyer receives the underlying shares, and the seller gives them to the buyer (delivers them) at the strike price.
This contrasts with cash settlement, where only the difference in price is paid.
Why physical settlement matters to investors
Understanding physical settlement can help investors:
● Understand what occurs when an option is exercised
● Differentiate between cash and physical delivery
● Manage portfolio holdings if physical delivery occurs
● Plan for potential transaction costs and logistics
Physical settlement involves actual delivery of underlying shares, which can result in additional costs, administrative requirements, and potential delays.
Investors should be aware of these factors and the practical implications before entering contracts that may lead to physical delivery.