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How does options settlement work?

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All Options contracts are settled in cash daily and the expiration date. Traders are not required to hold any stocks.

After settlement of options contracts, it takes T + 1 day or 1 business day for the transaction to be posted to the investor's demat account.

Buy-side options settlement: The maximum loss in a buy-side option is the premium paid. So the settlement of options on the buy side starts with the settlement of the premium, and then you are done until the position is closed or expires.

Sell-side options settlement: In option settlement on the sell side, the initial margin is paid in advance. This is followed by MTM (mark-to-market) settlement, which takes place daily, and finally, final option settlement, which takes place when the position is liquidated or until expiry.

An option can be exercised in two ways - by squaring off or by expiring worthless. If the option holder decides to exercise the option on expiry, this is referred to as a squaring-off.

An option contract can also be fulfilled by allowing it to expire worthless. In this case, the option buyer loses the premium paid to conclude the contract. This procedure is usually applicable if the value of the underlying asset has fallen sharply.

This settlement option is only available to option buyers. It is not available to sellers.

Until recently, trading in equity futures and options in India was settled through cash settlement, but now physical delivery of shares is being gradually introduced for all equity F&O contracts. Settlement of exercises will be done through cash settlement by debiting or crediting the settlement accounts of the concerned clearing members.

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