Options Settlement Date: A Guide to Expiration and Settlement

The options settlement date is a critical concept for traders to understand, as it determines when options expire and are settled. The settlement date is typically the third Friday of every month, but it can be affected by holidays and other market closures.

The expiration date, on the other hand, is the last day an option can be exercised. This date is also typically the third Friday of every month, but it's essential to note that options expire at the close of trading on this day.

If an option is not exercised, it will be automatically settled on the settlement date. This means that the option will be closed out, and the buyer will lose their premium, while the seller will keep the premium.

All options have an expiration date, which marks the last day to either exercise or assign options.

Options settlement time becomes crucial on the expiration date, as any in-the-money options are typically exercised automatically by your brokerage.

In-the-money (ITM) options convert to long shares or short shares at expiration, depending on the type of option.

If you don't want automatic exercise, close the contract before the expiration time.

Out-of-the-money (OTM) options expire worthless and are cleared from your trading account.

Most traders close OTM contracts before expiration to avoid unnecessary actions.

Brokers might charge extra if an option is automatically exercised or assigned because it wasn’t closed in time.

The option settlement date is when the trades officially settle, usually the next business day.

Here's a quick summary of what happens to options at expiration:

Options Expiration is a critical concept in options trading, and understanding how it works is essential for managing your portfolio effectively. Options expiration is the last trading day for exercise and assignment.

The expiration date and time is standardized based on the terms of the options contract. Options contracts that expire in-the-money are typically exercised automatically by the brokerage firm that holds the account. This means that if you have an in-the-money call option, it will be converted to long shares of stock, and if you have an in-the-money put option, it will be converted into short shares of stock at expiration.

If you don't want an in-the-money contract to be automatically exercised, then you must close the contract prior to the expiration time on the expiration date. This is because brokers may charge additional fees if an options contract is not closed prior to expiration and is automatically exercised or assigned.

Options contracts that expire out-of-the-money will expire worthless and are removed from the trading account with no further action needed. Most options contracts are closed before expiration and do not go through the exercise and assignment process.

Here are the key things to keep in mind about options expiration:

By understanding how options expiration works, you can better manage your portfolio and avoid unnecessary fees.

Physical settlement is the most common form of settlement and involves the physical delivery of the underlying security at settlement. This is typically used for American-style option contracts, where early exercise is possible.

For example, physical settlement of a long equity call option would be the purchase of 100 shares of the underlying security at the contract's strike price. Conversely, physical settlement of a long equity put option would require selling 100 shares of the underlying security at the contract's strike price.

Cash settlement, on the other hand, involves a monetary exchange rather than delivering the asset. This method is common for index options, as indices can't be physically delivered. Cash settled contracts typically have European-style expirations and can only be exercised on the settlement date.

In cash settlement, the holder of the options receives the difference between the strike price and the current index value. For instance, if the SPX index is at 5800 and a 5750 call is exercised, the holder receives a cash settlement of (5800 – 5750) x $100 = $5,000.

Physical settlement is the most common form of settlement in options contracts.

It involves the actual delivery of the underlying security at settlement, which means the holder of the option buys or sells the underlying security if it's exercised.

Physical settlement of a long equity call option would require purchasing 100 shares of the underlying security at the contract's strike price.

Physical settlement of a long equity put option would involve selling 100 shares of the underlying security at the contract's strike price.

Physically settled options tend to be American-style option contracts, where early exercise is possible.

Most stock options are physically settled, but it's not always immediately obvious whether an option is physically settled or cash settled.

If you need to know whether an option is physically settled or cash settled, it's worth checking to be absolutely sure.

Physical settlement involves the actual delivery of the underlying asset, which is common with American-style contracts that allow early exercise.

For example, if you buy 100 shares at the option's strike price with a long equity call option, you physically receive the shares. Conversely, with a put option, you sell 100 shares at the strike price.

Cash settlement, on the other hand, involves a monetary exchange rather than delivering the asset. This method is common for index options, as indices can't be physically delivered.

The holder of the options receives the difference between the strike price and the current index value. For instance, if the SPX index is at 5800 and a 5750 call is exercised, the holder receives a cash settlement of (5800 – 5750) x $100 = $5,000.

European-style contracts are typically cash settled, exercisable only on the option settlement date. This clarifies when options trades settle and the options settlement time.

Cash settled contracts can only be exercised on the settlement date and have European-style expirations, meaning they are settled automatically at expiration if they are in profit.

Contract Requirements are crucial to ensure smooth transactions. American-style options can be exercised any time before expiration, while European-style options are only exercised on the expiration date.

If you're buying shares for put options or selling for call options, it's essential to know the exercise flexibility of the options you're dealing with. Once an option is exercised, it's final, and the seller must fulfill their obligation.

Brokers may have specific requirements for exercise notifications, so it's vital to stay informed about your broker's policies. Some brokers may require an earlier exercise notification on the expiration date than the exchange listing.

Here's a quick rundown of what you need to know about contract requirements:

The settlement timeline for options contracts varies based on the type of contract, with equity options typically settled at P.M. while VIX index options and some SPX index options are settled at A.M.

Brokerage firms may set an earlier exercise notification time in the day on the expiration date than the exchange where the option is traded, so it's essential to check with your broker for specific details.

The options settlement time is crucial, as any in-the-money options are typically exercised automatically by your brokerage on the expiration date.

Here's a breakdown of the settlement process:

Most options contracts are closed before expiration and do not go through the exercise and assignment process, but if an in-the-money contract is not closed prior to expiration, it will be automatically exercised or assigned, potentially incurring additional fees from your broker.

Settlement timelines can be tricky to navigate, but understanding them is crucial for managing your options portfolio effectively.

Equity options are typically P.M. settled, while VIX index options and some SPX index options are A.M. settled.

Buyers of options contracts can exercise their option any time prior to the expiration time on the expiration date for American-style contracts or on the expiration date for European-style contracts.

Brokerage firms may set an earlier exercise notification time in the day on the expiration date than the exchange where the option is traded.

Once an options contract is exercised, the decision is irrevocable, and the options contract seller will be responsible for honoring their obligation.

Here's a key timeline to keep in mind:

In-the-money options are typically exercised automatically by your brokerage at expiration, converting calls to long shares and puts to short shares.

If you don't want automatic exercise, close the contract before the expiration time to avoid unnecessary actions.

OTM options expire worthless and are cleared from your trading account at expiration, so it's a good idea to close them before then to avoid extra charges.

Options trading has its own unique timeline, and understanding it can make all the difference in managing your portfolio effectively. Options contracts have an expiration date, which is the last day the contract is valid.

You can choose to exercise the option, trade the contract to close the position, or let it expire worthless. If the option is in-the-money, it will automatically be exercised at expiration, but if it's out-of-the-money, it will expire worthless and be cleared from your trading account.

There are different types of options expirations, including daily, monthly, weekly, and long-term options. Daily options expire within 24 hours of purchase, while monthly options expire on the third Friday of every month. Weekly options expire on Fridays, and long-term options, known as LEAPS, can expire up to two years and eight months in the future.

Here are some common types of options expirations:

If you don't want automatic exercise, close the contract before the expiration time to avoid unnecessary actions. Your brokerage might charge extra if an option is automatically exercised or assigned because it wasn't closed in time.

Comparing Assignments and Exercises is crucial to understand options settlement.

Assignment is a process in options settlement where the option holder's position is transferred to the underlying asset's owner.

In the options market, assignment and exercise are two key processes, but they serve different purposes.

Assignment occurs when an option holder's position is transferred to the underlying asset's owner, whereas exercise is when an option holder buys or sells the underlying asset.

Exercise is typically done when the option holder wants to realize the value of the option, whereas assignment is done when the option holder's position is transferred to someone else.

Options Market Concepts are built around a few key concepts. These include strike price, expiration date, and underlying asset.

The strike price is the price at which the buyer of the option can buy or sell the underlying asset. This is a crucial factor in determining the value of the option.

Options can be either calls or puts. Calls give the buyer the right to buy the underlying asset, while puts give the buyer the right to sell it.

Expiration date is the last day on which the option can be exercised. This is typically the third Friday of the month for standard options.

Options can be exercised on the expiration date or before it, but only on a specific date, known as the settlement date.