Physical Settlement
When a derivative is settled on expiry by delivering the actual underlying shares, not just exchanging cash.
Definition
Physical settlement means a derivative contract held to expiry is closed by delivering the actual underlying asset rather than settling the difference in cash. In India, all stock futures and stock options are physically settled: positions open at expiry result in the delivery or receipt of the underlying shares. Index derivatives, by contrast, are cash settled.
Why it matters
Physical settlement carries real consequences. An in-the-money stock option taken to expiry obligates you to give or take delivery of shares, requiring the full contract value in funds or the actual stock. This is why brokers raise margins sharply in expiry week for stock F and O, and why most traders square off or roll positions before expiry to avoid an unexpected delivery obligation.
Example
You hold one lot of a stock call option that finishes in the money at expiry and do not square it off. Under physical settlement you must take delivery of the underlying shares at the strike price and arrange the full purchase amount. A trader unprepared for this can face a large fund or stock shortfall and associated penalties.
See it live
Track expiry-day positioning and moneyness in real time on TradePulse's live option chain to manage settlement risk.