Settlement Types: Cash vs Physical

When an option expires in-the-money, it needs to settle. There are two ways this can happen.

Quick Comparison

	Cash Settlement	Physical Settlement
What happens	Pay/receive the cash difference	Actual asset changes hands
Delivery	None - just USDC	You get/give the underlying
Simpler for	Index options, crypto	Stock options
Margin impact	Predictable	Need to handle delivery

Cash Settlement

With cash settlement, you receive or pay the difference between the settlement price and strike. No actual asset changes hands.

Example - Long Call:

• Strike: $100,000
• Settlement price: $105,000
• You receive: $5,000 (in USDC)

Example - Short Put:

• Strike: $95,000
• Settlement price: $90,000
• You pay: $5,000 (in USDC)

Hypercall uses cash settlement

All options settle in USDC. You never need to worry about taking delivery of BTC or ETH - everything is handled automatically.

Physical Settlement

With physical settlement, the actual underlying asset changes hands:

• Call exercised: You buy the asset at strike price
• Put exercised: You sell the asset at strike price

This is common for stock options where traders actually want the shares.

Why crypto prefers cash settlement:

• No delivery logistics
• Works for assets you can't easily hold (like index prices)
• Simpler margin calculations
• No "delivery squeeze" risk

Short answer: Yes-physical settlement carries a liquidity premium.

With cash settlement, you just receive the cash difference at expiry. The only thing that matters is the settlement price. Liquidity of the underlying doesn't directly affect your payout.

With physical settlement, someone has to actually deliver the asset. This introduces two costs:

1. Spread crossing cost

If you're short a call that expires ITM, you need to deliver the underlying. If you don't already own it, you'll have to buy it-at the offer price. For illiquid assets with wide bid-ask spreads, this can be expensive.

The cost scales with the option's delta-deep ITM options (delta ≈ 1) require full delivery, while OTM options require none.

2. Squeeze premium

When open interest is high relative to the underlying's circulating supply, there's risk of a delivery squeeze. Everyone needs the same asset at the same time, and prices spike.

This is why physical-settled Bitcoin options would be problematic-if OI exceeded available BTC, settlement would be chaotic. Cash settlement with a TWAP sidesteps this entirely.

Try it yourself: Adjust the spread and OI ratio to see how liquidity affects physical settlement costs.

Asset

Bid-Ask Spread2.00%

Underlying's trading spread

OI / Market Cap30.0%

Live OI data for undefined

2.0% Spread · 30.0% OI

Cash$11.92

Physical$12.89

Premium+$0.96

8.1% of cash price

Settlement Price

For cash settlement, the settlement price determines the payout. On Hypercall:

• Uses a 30-minute TWAP (time-weighted average price)
• Ends at 08:00 UTC on expiry day
• Resistant to last-minute manipulation

Automatic Settlement

On Hypercall, you don't need to do anything at expiry:

1. Trading stops at 08:00 UTC
2. Settlement price is calculated (30-min TWAP)
3. ITM positions automatically pay out
4. OTM positions expire worthless
5. Your balance updates

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Related:

• Exercise Styles: American vs European
• Lesson 9: Expiry & Settlement - Deep dive