Exercise settlement value

When an option is in-the-money at expiry, somebody has to work out exactly how much money — or how many shares — changes hands. That figure is the exercise settlement value.

It is simply the option's intrinsic value at expiry: for a call, how much the underlying's closing price exceeds the strike; for a put, how much the strike exceeds the closing price.

Chapter 7, section 7.3.1, gives the formula:

Call options = Closing price of the security on the day of exercise - Strike price
Put options  = Strike price - Closing price of the security on the day of exercise

For index options, final settlement is always in cash, by debit or credit to the clearing members' accounts through the clearing bank, on T+1, where T is the exercise date. For options on individual securities that settle by delivery, the exercise settlement value becomes the cash amount payable for the shares delivered: strike price × lot size. A long call holder who is in-the-money takes delivery of the shares and must have that amount ready; a long put holder who is in-the-money delivers the shares and receives that amount.

A client holds a call option on an index with a strike of 17,500; the index closes at 17,800 on expiry, lot size 50.

Exercise settlement value per unit = 17,800 − 17,500 = 300. Total payable to the client = 300 × 50 = Rs 15,000, settled in cash on T+1.

Separately, Mr P holds one lot of a stock call option, strike Rs 475, lot size 1,500; the stock closes at Rs 510 on expiry. The option is in-the-money, and since this settles by delivery, Mr P takes delivery of 1,500 shares and pays 475 × 1,500 = Rs 7,12,500 on T+1 — the exercise settlement value here is expressed as the amount payable for delivery, not a cash difference.

Compare Mr Q, who holds one lot of a put on the same stock, strike Rs 475, lot size 1,500, with the stock closing at Rs 410. The put is in-the-money; Mr Q delivers 1,500 shares and receives 475 × 1,500 = Rs 7,12,500.

Chapter 7, section 7.3.1, gives the call and put exercise settlement value formulas and works through index and stock examples with different lot sizes. Expect a numeric question computing the exercise settlement value, and a check on whether settlement is cash (index options) or delivery (stock options settling by delivery).

• Call: closing price minus strike. Put: strike minus closing price. Reversing the two is the most common slip.
• Index options always cash-settle; only options on individual securities can settle by delivery, and then the exercise settlement value is expressed as strike × lot size, not just the intrinsic-value difference.
• T+1 timing, where T is the exercise date — the same T+1 rhythm as daily premium settlement, but this is the final leg, not the daily one.