Options settle in one of two ways, and which one applies changes what can land in your account at expiry.
Physically settled
Shares actually change hands. This covers US equity and ETF options and ASX equity options. If a physically settled option finishes in the money, stock is bought or sold in your account at the strike price.
These are also American style, which means they can be exercised at any time up to expiry rather than only at the end.
The practical consequence is funding. A long call finishing in the money will be exercised automatically and buy the shares, which on a large position can be a substantial purchase appearing overnight. If the account cannot carry that, the position needs closing before expiry rather than left to settle.
Cash settled
No shares ever change hands. The difference between the strike and the settlement level is simply paid or received in cash. This covers index options such as XSP in the US and the ASX index options.
These are European style, meaning they can only be exercised at expiry, so early assignment is not possible.
Because nothing is delivered, there is no funding question and no share position to manage afterwards. A cash settlement simply appears as a credit or debit on the account.
Why the settlement lines can look confusing
On a statement, cash settlements on index options are usually already netted inside the realised result for that option series rather than sitting separately. Taking the settlement figure and applying it again to the option result will double count it.
If you are reconciling a statement and the numbers do not appear to agree, this is the most common reason.
This article explains how the mechanics work and is general information only. It does not take into account your objectives, financial situation or needs. Wealth Magnet Pty Ltd t/a Australian Investment Education is authorised to provide general advice in Securities and Derivatives.