Index Options Exercise and Cash Settlement Rules
When an investor exercises an in-the-money S&P 500 Index (SPX) call option, how is the transaction settled?
Index options are cash settled. Upon exercise, the writer delivers cash equal to the intrinsic value (closing index value minus strike price multiplied by $100) on T+1.
Complete Analysis & Legal Rationale
Because delivering physical shares of 500 different companies is impractical, broad-based index options (SPX, OEX, NDX) settle in CASH on the next business day (T+1). The amount delivered equals the difference between the closing index level and the strike price multiplied by $100.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Correctly identifies cash settlement equal to intrinsic value on T+1.
Physical delivery of 500 stocks is never required for index options.
SPX index options do not convert into SPY ETF shares.
Settlement is T+1, not same-day trade date.
Official Standard: Establishes cash settlement mechanics for broad-market and narrow-based index options.