Physical Settlement
Settlement of a derivative by actual delivery of the underlying security against payment, rather than by cash difference.
How it is identified
Test: at expiry, an in-the-money contract obliges delivery of Lot Size units against payment of Strike x Lot Size
Unit
qualitative
In depth
All single-stock futures and options in India are physically settled, which means an in-the-money option left open at expiry creates a delivery obligation rather than a cash credit. The obligation is for the full contract value, so a trader holding a cheap option can suddenly owe several lakh rupees, and failure to deliver goes to auction with penalties. This is the most consequential settlement detail in the Indian derivatives market and the one most often discovered the hard way. Index derivatives are cash settled, which is why the same expiry-day carelessness has no equivalent consequence there.
Worked example
A 500 call on a stock with a lot size of 1,000 expires with the stock at ₹512. The holder must pay 500 x 1,000 = ₹5,00,000 and take delivery, having perhaps paid only ₹8,000 for the option.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Physical Settlement” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.