Settlement for options

FINRA FINRA SIE
1

So do options settle in 1 day or 2? I am confused. Thanks!

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Hi @bradydayton, welcome!

The difference between these two similar questions is that the first is asking when the trade of the option itself settles, whereas the second is asking when the trade resulting from the exercise of the option settles.

  • Cash settlement (for basically anything): Same day, as long as by 2:30pm ET
  • Regular-way settlement: T+1 for Treasury (US gov’t) securities and all options (except exercising equity options)
  • Regular-way settlement: T+2 for everything else, including stocks, corporate bonds, muni bonds, and exercises of equity (stock) options

Hope this helps to clear it up!

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I don’t quite understand the difference here. Sorry. Can you explain further? Like the trade between the two parties settles in 1 day? But if its exercised it settles in 2 days?
I understand cash settlement as well as regular way for gov’t and everything else.

4

Hey Brady,

If a purchase an ABC call option, I don’t actually own ABC stock. Rather, I own the right to purchase ABC stock at a fixed price for a limited time. Buying or selling an option itself settles in T+1.

When the option is exercised, that’s when the trade is made for the underlying security. It’s like a normal market value stock trade, except instead it’s at a preferential price. And like a normal stock trade, it’ll settle in T+2.

5

Hi @bradydayton!

@Justin is absolutely right here, but here’s my attempt at covering every aspect of options settlement:

  • Buying or selling any option: T+1 settlement
  • Exercising an equity (stock) option: T+2 settlement
  • Exercising an index option: T+1 settlement

Essentially, the only time a T+2 settlement exists is when an equity (stock) option is exercised. The settlement morphs into stock’s typical settlement as shares of stock are being bought or sold during the exercise. Exercise of an index option does not result in buying or selling shares; instead, the writer is obligated to deliver the “in the money” amount (a.k.a. intrinsic value) to the holder upon exercise. That’s why index option exercise is T+1.

I hope this helps! Please DM me or respond to this thread if you have any further questions.

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