Options Settlement: How Are Call & Put Option Contracts Settled?

Published on Friday, August 10, 2018 by Chittorgarh.com Team | Modified on Thursday, June 6, 2019

There are three ways to settle options contracts-

• Squaring Off: When you reverse the trade you are currently holding it is called squaring off. say you have bought 1 lot of Call option. You can settle this Call option by selling 1 lot of Call option of the same underlying asset and expiration. The difference in premiums will be your profit/loss from the trade. Some traders also choose to square off a Call option by buying a Put option of same underlying and same expiry date.

• Physical Settlement: In the physical settlement, you can take delivery of stocks by exercising your option before the expiry date. If you have sold options, then you have to deliver shares to the buyer and vice versa. However, physical settlement is only possible in stock options and not on index options. In India, options are only settled in cash.

• Allowing the contract to expire: You can also allow the option contracts to expire worthlessly. You will lose the premium paid while buying the contract. This is particularly useful when the trade has gone downward.

Let's understand how Call and Put Options are settled.

How to Settle a Call Option:

Settlement of a Call option also varies depending on whether you are a buyer or a seller.

When you are a buyer of a call option, you have all three ways of settling option contracts- squaring off, physical settlement and allowing the contract to expire valuelessly.

If you are a seller of a call option then you have only one option of squaring off the trade. The other two options of physical settlement and allowing a contract to expire worthlessly is not available to you. To settle the Call option trade as a seller, you need to buy the same number of lots of the Call option of same underlying and same expiration that you have sold initially.

How to Settle a Put Option:

Settlement of Put options also differs depending on whether you are a buyer or a seller of:

If you are a buyer of a Put Option then all the three above mentioned options- squaring off, physical settlement and allowing the contract to expire worthlessly is available to you.

For a 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 of same underlying and expiration that you sold.