Options Settlement (Call or Put Options Settlement)
Option settlement is defined as the process in which options contract is resolved between the relevant parties when the option contract is exercised. Although option settlement is technically between the holder of options and the writer of those options. Rights and the obligations of both the parties are fulfilled through the contract settlement.
There are three ways of options contract settlement-
• Square Off: The process of reversing a trade that you are currently holding is called squaring off the position. Suppose you have bought one lot of call option; you can settle this call option by selling one lot call option of the same underlying stock/instrument and expiration. You can also choose to square off a call option by buying a put option of the same underlying stock with same expiry date.
• Physical Settlement: Physical settlement of options is most commonly used form of settlement which involves the physical or actual delivery of the underlying assets. However, this settlement is only possible for stock options and not in index options.
• Allowing the contract to expire: Option contract can also be allowed to expire worthlessly. When the trade is downward situation then you can use this process.
Process of Call and Put Option settlement:
The process of settlement is also depending upon whether you are a buyer or a seller.
Let’s understand how it works-
If you buy a Put Option then all three conditions-squaring off, physical settlement and allowing the contract to expire worthlessly is available for you.
If you are a seller of a Put Option then square off is the only option available for you. You can buy back the exact number of lots of the Put option of same underlying stock with same expiry date that you sold.