SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

What Are Cash-Settled Options?

Options are finite, wasting assets. They have a shelf-life, and they cease to exist after their expiration. So when that expiration date comes, there needs to be a mechanism in place to ensure that both sides of an option contract hold up their side of the bargain.

After all, at their core, options are just contractual agreements between a buyer and seller to potentially do a transaction on a specific date. And the process that ensures that the transaction, or lack thereof, goes smoothly is called options settlement.


What is Option Settlement?

Options settlement is a fulfillment of the contractual conditions in an options contract. In other words, settlement ensures that the two parties to an options contract get what is owed to them.


But there are different types of options contracts. Luckily for us, in the listed options market, there are only two types of options: American-style and European-style. European options are cash settled, while American options settle physically.


This article will focus on the cash settlement process and how it works.


Cash Settlement in a Nutshell

A call option is the right to buy an asset at a specified price and date. This is a straightforward concept in theory, but in practice, complications arise.


For instance, there are options listed on the S&P 500 Volatility Index (VIX), but the VIX isn't actually a tradable security. It's simply a mathematically derived formula that other securities derive value from. You can't go and buy a share of VIX.


So how does a call option on such an index work?


That’s where cash settlement and European options come in. Basically, cash-settled options don’t require the transfer of the underlying asset (which would be impossible in this case), and instead involve the direct transfer of cash between the two parties of the option contract.


For instance, let's say we own a call option on the VIX index with a strike price of $19, and at expiration, the VIX index is at $22.50, making the intrinsic value of our call option $3.50 at expiration. So the seller transfers $3.50 to us at expiration, and no transference of VIX is required.


And this entire cash settlement process is handled by the Options Clearing Corporation (OCC), a clearinghouse, and both parties to the trade have their accounts debited or credited the correct amount.


Why Cash Settlement Is Better Than Physical Settlement

Cash settlement dramatically simplifies things for options traders. With the simple automatic cash transfer between parties settling things, traders can hold cash-settled options into expiration without issue.


On the other hand, Physically settled options can create all types of problems for traders. One of the biggest annoyances with physically settled options


For one, getting assigned early and being forced to buy or sell 100 shares of stock they had no interest in owning or having a short position in. And for this reason, traders of physically settled options always have to make sure they close their positions before expiration. Otherwise, they might end up owning shares of stock they don't want.


Options Style: American vs. European Options

Remember, two distinct styles of options trade on listed markets: European and American.


And distinguishing between them is simple. If you’re trading an option on a stock or ETF, that is an American option.


Other types of options, like those listed on an index (like in our VIX example) or futures options, are primarily European options, with a few exceptions.


Regarding practical differences, there are really only two differences to note between American and European options: when they can be exercised and how they settle.


American Options

European Options

Can be exercised at any time prior to expiration

Can only be exercised at expiration

Physical settlement; actual transfer of underlying asset.

Cash settlement; intrinsic value is transferred in cash to the holder at expiration.


Examples of Cash Settled Options

Now let’s take a look at the different types of assets that have European or American-style listed options listed:


American Options

European Options

US stocks and ETFs (like AAPL and SPY)

Cash indexes (like VIX or SPX)


Most futures, with some key exceptions. Always check contract specifications on the exchange website.


A Common Misconception: European Options Do Trade on Exchanges

Many popular articles about the differences between American and European options report that European options tend to trade over-the-counter (OTC), while American-style options trade on exchanges. This is inaccurate.


For instance, S&P 500 Cash Index (SPX) options, which are options on the untradable cash index of the S&P 500, trade on the CBOE. Another example is most E-mini S&P 500 futures (/ES) options, which are also European-style and trade on the CME.


Bottom Line

To wrap things up, only European options are cash-settled. Cash settlement involves simply transferring the intrinsic value in cash at expiration. Examples of European options are those traded on indexes like the SPX or VIX, as well as most futures options. In contrast, all US stock options, like AAPL, MSFT, or SPY, are American-style and settle via physical delivery of shares.

Related articles


What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles


  • Covered Calls Options Strategy Guide

    Covered calls have always been a popular options strategy. Indeed for many traders, their introduction to options trading is a covered call used to augment income on an existing stock portfolio. But this strategy is more complicated, and riskier, than it looks.

    By Chris Young,

  • How Options Work: Trading Put And Call Options

    Learning how options work is a key skill for any trader or investor wanting to add this to their arsenal of trading weapons. It’s really not possible to trade options well without having a thorough grounding of the mechanics of what these derivatives are and how they work.

    By Chris Young,

  • Protective Put: Defensive Option Strategy Explained

    The protective put (sometimes called a married put) strategy is one of the simplest, but most, popular, ways options are used in the market. Here we look at this defensive strategy and when and how to put it in place. Options provide investors and traders with an extremely versatile tool that can be used under many different scenarios.

    By Chris Young,

  • The Surprising Secret to Proper Portfolio Diversification Revealed

    During a discussion about my trading system, the question arose regarding the ability to exit positions entirely and mitigate substantial drawdowns during a crash-style event. This particular circumstance has caused concern about the effectiveness of the trading method. The common response to such concerns is often centered around the concept of maintaining a properly diversified portfolio.

    By Karl Domm,

  • Options Trading Strategy: Bear Put Spread

    Options can be an extremely useful tool for short-term traders as well as long-term investors. Options can provide investors with a vehicle to bet on market direction or volatility, and may also be used to collect premiums. A long options position is simple to use, and has defined risk parameters.

    By Chris Young,

  • Market Chameleon Trial Offer

    We are pleased to announce that Market Chameleon is offering SteadyOptions members a 2 week free trial for their premium tools. Market Chameleon is a premier provider of options information, using both stock fundamentals data as well as options analytics to provide better insight for those who wish to make informed investment decisions.


    By Kim,

  • Where Should You Be Investing Your Money?

    Everyone should be investing. After all, there’s no better way to increase your retirement savings and boost your spending power than by putting your money to work. Many people believe that investing is something that only wealthy people or financial experts can do, but that’s not the case.

    By Kim,

  • Options Trading Strategy: Bull Call Spread

    The bull call spread is a simple strategy that can be used by novice options traders to bet on higher prices. Options can be an extremely powerful tool in the trading arsenal of those that know how to use them, and long options positions can be used to bet on a market rise or decline, with limited risk and potentially unlimited profit potential.

    By Chris Young,

  • Stock Option Strike (Exercise) Price Explained

    The option strike price (also known as the exercise price) is a term used in options tradingOptions are derivatives. These financial instruments are ‘derived’ from another underlying security such as a stock, and give the right (but not the obligation) to buy or sell the underlying at some point in the future.


    By Chris Young,

  • Mastering the Art of Options Trading: Tips for Small Accounts

    Growing a small trading account with options can be a challenging task, but it is definitely achievable. When I began my journey in trading options, my goal was to double my small account every three months. However, I quickly learned that taking excessive risks without proper risk management would only lead to starting over again and again by adding new funds to my account.

    By Karl Domm,


  Report Article

We want to hear from you!

There are no comments to display.

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

Options Trading Blogs Expertido