STSM112060 | Derivatives: introduction to options: cash settlement

The terms of an equity option contract will specify the manner in which the contract will be settled when the holder exercises the option (STSM112050)

While the terms of an option contract may allow settlement in the form of an actual delivery if the underlying security upon exercise if the option the majority of exercised options result only in a cash settlement. In these cases the open market cash value of the underlying security is netted against the ‘strike’ price (STSM112010) amount and the difference is paid to the option holder.