Real option settlement
Settlement in options trading is the process where the terms of an options contract are resolved between the holder and the writer. In options trading, the holder is the one who owns an options contract and a writer is the person who sold the holder that options contract.
Settlement in call options contracts involve the holders of the options contracts paying the writers for the underlying asset at the strike price.
Learn how and when to remove this template message In finance, the expiration date of an option contract represented by Greek letter tau is the last date on which the holder of the option may exercise it according to its terms. In the case of options with "automatic exercise" the net value of the option is credited to the long and debited to the short position holders. Typically, exchange-traded option contracts expire according to a pre-determined calendar.
Settlement in put options contracts involves the holder of the options contract selling the underlying asset to the writer at the strike price. After settlement, the options contract will cease to exist and all obligations between the holder and the writer would be resolved. Settlement can happen under 2 circumstances; Voluntary exercise by the holder or automatic exercise upon expiration.
A cash-settled option is a type of option for which actual physical delivery of the underlying asset or security is not required. The settlement results in a cash payment, instead of settling in stocks, bonds, commodities or any other asset. This type of option avoids the high costs of transport or transaction fees. Another reason for using it could merely be that the purchaser does not wish to hold the real investment due to storage costs or other non-financial reasons.
The holder of an American Style Option could choose to voluntarily exercise their options anytime prior to expiration. Once that happens, settlement takes place between the holder and the writer and the options contract is resolved.
Upon expiration of an options contract, whether American Style or European Styleit is automatically exercised if it is in the money on expiration day. Options Settlement Styles There are two main ways in real option settlement options are settled in options trading; Physical Settlement and Cash Settlement.
- Physically Settled Options - Introduction Physically Settled Options, or physically delivered options, are options with the physical settlement feature.
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Physical settlement involves the transfer of the actual underlying asset between the holder and the writer as described above and is the most common type of settlement method. In fact, all stock options that are publicly traded in the US real option settlement Options Settlement where you actually get the stocks if you exercise a call options and actually get to sell your stocks if you exercise a put option.
In fact, due to this characteristic, almost all physically settled options are American Style Options which you get to exercise at anytime prior to expiration.
Options Settlement - What Really Happens In theory, options settlement is a resolution between a holder and a writer of options but in reality, when stock options are exercised and settled in the US market, it is the Options Clearing Corporation or OCC that actually pays as your counter party.
If you exercised call options that you own, it is the OCC that gives you the stock. If call options that you hold are being assigned, it is the OCC that takes the stock from your account.
This happens through an Options Assignment process.
Yes, the resolution of all options contracts in options trading are guaranteed by the OCC in such a manner so that you will never have to worry if "the other party" has the money or assets to fulfill their part of the contract. This is because you are really trading with the OCC instead of another trader or investor.
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