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Cash settlement

Settling an option in cash rather than delivering shares — standard for index options like SPX.

Cash settlement means that when an option expires in the money, no shares actually change hands. Instead, the difference between the strike and the settlement price is paid out in cash to your account. This is how most index options work, such as those on the S&P 500 or major volatility products, because you cannot realistically deliver an index.

Say you hold a call with a 4000 strike on a cash-settled index and it closes at 4025 on expiration. You simply receive the 25 points times the contract multiplier in cash, and the position disappears. There is no need to buy or sell the underlying, and no assignment of stock to manage afterwards.

The common mistake is treating a cash-settled index option like an equity option. Many of these settle on a special opening price the morning after the last trading day, not on Friday's close, and some stop trading a day early. If you assume you can exit at the Friday number, that overnight gap between your last chance to trade and the actual settlement can move against you.

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Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.