Index Options: Cash Settlement Mechanics, Multiplier, and Delivery Time
An investor holds 1 S&P 500 Index (SPX) Dec 5,000 Call. At expiration, the S&P 500 settlement value closes at 5,045. Upon exercise, what does the call holder receive from the Options Clearing Corporation (OCC), and when does settlement occur?
Index options settle in CASH (Intrinsic Value × $100 multiplier) on the next business day (T+1). No physical shares are ever delivered.
Complete Analysis & Legal Rationale
Because delivering physical shares of 500 distinct companies is logistically impractical, index options (such as SPX, OEX, NDX) settle exclusively in CASH. The amount of cash delivered upon exercise is the difference between the strike price and the closing settlement index value multiplied by the contract multiplier ($100). Here: ($5,045 - $5,000) = $45 in-the-money × $100 = $4,500 cash. Under OCC settlement rules, index option exercise settlements take place on the business day following exercise (T+1).
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:
Physical delivery of index basket stocks is never required; index options are strictly cash settled.
Accurately applies $100 contract multiplier ($4,500) and identifies T+1 cash settlement.
Fails to multiply the $45 per-point difference by the standard $100 index multiplier.
SPX options are broad market index options settling in cash, not equity options on the SPY ETF.
Official Standard: Governs cash-settlement procedures and T+1 funds delivery for broad-based index contracts.