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Published on Friday, August 10, 2018 by Chittorgarh.com Team | Modified on Wednesday, February 28, 2024
Settlement is the process by which the terms of an option contract are settled between the parties involved, either through the exchange of shares or cash. Since all option contracts in India are European, they can be exercised only on expiry. The settlement date for the exercise of the option is therefore the expiry date. Exercise can be voluntary if the holder chooses to exercise at expiry or automatic if the contract is in the money at the time of expiry.
The settlement cycle is the time it takes to settle a trade. On Indian exchanges, the settlement cycle for all traded instruments is T+1 day, where T is the trading day. If there is a public holiday, the settlement process is extended by one more day.
In India, index options are always settled in cash and are generally European-style options, i.e. they are not settled until the maturity date and cannot be exercised early.
Clearing houses act as third parties in futures and options contracts, as buyers for each seller of a clearing member, and as sellers for each buyer of a clearing member. The duties of a clearing house include "clearing" or closing trades, settling trading accounts, collecting margin payments, organizing the transfer of assets to their new owners, and reporting trade data.
The clearing house comes into play after a buyer and a seller have concluded a trade. Its task is to carry out the steps that lead to the conclusion and thus the validation of the transaction. By acting as an intermediary, the clearing house provides the security and efficiency that are essential for the stability of a financial market.
Settlement of a Call option also varies depending on whether you are a buyer or a seller.
As a buyer of a call option, you have all three ways to settle options contracts: squaring off, physical settlement and worthless expiration of the contract.
If you are the seller of a call option, you only have the option of settling the trade. The other two options, namely physical settlement and the worthless expiry of the contract, are not available to you. To settle a trade in a call option as a seller, you must buy the same number of lots of the call option with the same underlying and expiration that you originally sold.
The settlement of put options also differs depending on whether you are the buyer or seller of a put option:
As the buyer of a put option, all three of the above options are available to you: squaring off, physical settlement and worthless expiration of the contract.
For the seller of a put option, squaring off is the only option available. You can buy back the exact number of lots of the put option with the same underlying expiration that you sold.
Settlement is the process by which the terms of an option contract are settled between the parties involved, either through the exchange of shares or cash. Since all option contracts in India are European in nature, they can be exercised only on expiry. Therefore, the settlement date for exercising the contracts is the expiry date.
Options require one trading day for settlement. With a margin account, you can trade immediately with funds from unsettled stock and option sales. Cash accounts cannot be traded with unsettled funds.
A clearing house acts as an intermediary for trading by acting as an implicit counterparty for both the buyer and the seller of an option. It applies to the capital market, with the exchange validating the capital trade until settlement.
Unlike shares of stock, which have a two-day settlement period, options settle the next day.
In India, options are always settled by cash. It takes T+1 days to settle the options.
If the trader has in-the-money open positions, they will be automatically settled on the expiration day.
In India, option contracts are settled on day T+1.
Yes, all options, including index and equity options, are settled in cash on day T+1, where T stands for the trading day.
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