DEFINITION of 'Cash-Based Option'
A type of option which is always settled in cash. Upon exercise, the net value to the involved parties are calculated and a cash payment is made to settle the difference. This option is advantageous for investors who want to capture movements in stock prices only, and not be required to enter a position following the exercise of an option.
BREAKING DOWN 'Cash-Based Option'
For example, let's say you purchase a cash-based call option contract with a strike price of $55. You exercise the option when the underlying stock price reaches $60 per share. Since one contract is for one hundred shares, the net value to you is $500 ( (60-55) x 100 ). In this case, you will receive $500 in cash, instead of being required to purchase 100 shares of stock for $55.