Cash-settled or cash-based options settle through a cash payment instead of delivery of the underlying. For a conventional call, the expiration amount is the greater of settlement value minus strike or zero, times the multiplier. For a put, it is the greater of strike minus settlement value or zero, times the multiplier. The official settlement value and exercise terms are specified by the contract.
Cash settlement is performed when delivery of the underlier is inconvenient, costly or simply not possible.
For example, the S&P 500 index option is cash settled because not only would physical delivery be inconvenient, the transaction costs incurred to deliver all 500 component stocks that make up the index would be too high.
Similarly, CBOE Volatility Index® (VIX®) options are also cash settled as physical delivery is impossible since the underlying is not an asset but merely a statistic.
The settlement value can differ from the last displayed market quote. Check the exact series, last trading time, observation procedure and multiplier. Cash settlement does not by itself establish American or European exercise style.
