Cash-Settled Options


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.

BREAKING DOWN '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.

  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 ...
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