Physically Settled Option

What is a physically settled option?

A physically settled option is an option that transfers its specified underlying asset or deliverable when exercised, against payment of the strike price. A standard US equity contract delivers 100 shares. A call holder purchases the deliverable and a put holder sells it, while the assigned writer takes the other side of that exchange.

The transfer takes place through brokerage and clearing records. Exercise style determines the permitted exercise time. Settlement terms determine what changes hands. A cash-settled option instead pays only the intrinsic amount, with no shares changing hands.

How much cash changes hands at exercise?

Calculate strike × contract multiplier × contract quantity for the exercise cash amount. Read the deliverable separately from the multiplier.

Exercise of one standard 45 call requires $4,500 and purchases 100 shares. With stock at $49, those shares are worth $4,900. The $400 intrinsic value is embedded in the acquired position.

The assigned call writer delivers the shares and receives $4,500. For a put, the holder delivers the shares and receives the strike cash; the assigned writer pays the cash and receives the shares.

What changes for adjusted contracts?

Corporate actions create series with specifically defined strike, multiplier, and deliverable terms. An adjusted deliverable may combine a different share quantity, another security, and cash.

Use the OCC adjustment memo to calculate each side of the exchange. Multiplying the strike by an adjusted share count conflates two separate contract terms. Calculate strike cash with the stated multiplier and value the deliverable as its specified package.

How is closing different from exercise?

A sell-to-close trade exchanges the option for its market premium. Exercise settles the option into its deliverable and cash exchange.

Compare the executable sale proceeds with the exercise result and resulting account position. Include remaining extrinsic value, transaction costs, and the stock exposure after exercise.

For a spread, evaluate each leg and the full position. Assignment on a short leg creates the specified stock or deliverable transaction while the separate long option remains open. Choose the next action using that resulting position’s payoff and capital requirement.

How do you plan physical settlement?

Translate the position into cash and shares before the exercise deadline. Five standard 80 calls require $40,000 to exercise and purchase 500 shares. Use the broker’s exercise cutoff and confirm the resulting account position. Equity exercise settlement completes on the next business day.

Inspect the traded contracts and possible related legs in options flow, then compare the option payoff in the options profit calculator. Map the stock delivery and strike cash for each exercise or assignment separately before choosing how to exit.

Limitations of physically settled options

• Fund exercise and assignment from the strike cash, not the premium. Five standard 80 calls need $40,000 to exercise, and assignment can create long or short stock with its own funding or margin requirement.
• Price a sale against early exercise. Exercising before expiration gives up any remaining extrinsic value, so a sale can return more.
• Manage the delivered stock as its own position. Once delivery completes, the account can hold stock with its own price exposure, and the intrinsic value captured at exercise can change as the stock moves.
• Adjusted contracts can deliver nonstandard share quantities, other securities, or cash, so read the OCC memo for the deliverable before sizing an exercise.
• Re-map a spread after assignment on one leg. Assignment creates stock while the long option stays open, so the spread’s original payoff no longer describes the position.

Bottom line

When exercised, a physically settled option ends in an exchange of the deliverable for strike cash, not a payment of intrinsic value alone. Before any exercise deadline, translate each position into the shares and cash it would create, confirm the account can carry them, and compare that result with selling the option.