Cash-Settled Options

AAA

DEFINITION of 'Cash-Settled Options'

A type of option for which actual physical delivery of the security is not required, due to the high costs of transport, or simply when the purchaser does not wish to hold the physical evidence of an investment. Cash is sent in the amount of the difference between the option strike price and the current value of the security at the exercise date.

INVESTOPEDIA EXPLAINS 'Cash-Settled Options'

This type of option is most often exercised when delivery of the underlier is inconvenient or the cost of transport is a major consideration. For example, when purchasing company stock for individual ownership, delivery costs would be minimal. However, if purchasing an S&P Index option, the security will generally not be sent out as the costs of transport would be so high due to the large volume of transactions that would occur.

RELATED TERMS
  1. Security

    A financial instrument that represents: an ownership position ...
  2. Cash Settlement

    A settlement method used in certain future and option contracts ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Exercise

    To put into effect the right specified in a contract. In options ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. Risk

    The chance that an investment's actual return will be different ...
Related Articles
  1. Options & Futures

    An Overview Of Commodities Trading

    Commodities markets, both historically and in modern times, have had tremendous economic impact on nations and people. Investing in commodities can quickly degenerate into gambling or speculation ...
  2. Investing Basics

    Pin Down Stock Price With Real Options

    How can you assign a value to what a company may do with its business in the future? We explain how it works.
  3. Options & Futures

    The "True" Cost Of Stock Options

    Perhaps the real cost of employee stock options is already accounted for in the expense of buyback programs.
  4. Options & Futures

    Options On Futures: A World Of Potential Profit

    There's one simple hurdle in the transition from stock to futures options: learning about product specifications.
  5. Options & Futures

    Trading OEX Options: The Risk Of Early Exercise

    Exercising early can benefit options traders, but only when trading American-style options.
  6. Options & Futures

    The ABCs Of Option Volatility

    The mystery of options pricing can often be explained by a look at implied volatility (IV).
  7. Options & Futures

    Top Brokers Offering Tools For Covered Calls

    Here are the brokers that offer the best tools for investors and traders to write covered calls and covered puts.
  8. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  9. Options & Futures

    The Perks of Trading Coffee Options

    As more people begin to trade coffee, we explain how coffee options work, who uses them, what drives valuations, and the risks and rewards.
  10. Trading Strategies

    Top Day Trading Instruments

    Day trading is an intense and often appealing activity. Investopedia provides the list of top financial instruments for day trading.

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center