Definition
Physical vs Cash Settlement
Physical settlement delivers the actual shares at expiry, while cash settlement just exchanges the profit or loss in money.
On the NSE, all stock F&O — both futures and options — is physically settled: in-the-money positions at expiry result in actual delivery of shares, requiring full cash for the buyer and shares for the seller. Index F&O like Nifty and Bank Nifty is cash-settled, so only the net difference is credited or debited.
This matters hugely for retail traders. An ignored in-the-money stock option at expiry can trigger physical delivery and a large margin or cash obligation. Brokers therefore warn and often auto-square-off such positions, and SEBI mandates extra delivery margins in the expiry week for stock F&O.
Related terms
- MarginMargin is the upfront money a trader must keep with the broker as collateral to take a leveraged futures or options position, set by the exchange to cover potential losses.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.