Does the Exercise of a Physically-Settled Option Require MTM?
The exercise of a physically-settled option itself does not directly require marking-to-market. When the option is exercised, the resulting transaction is either the purchase or sale of the underlying asset at the strike price.
If the option is on a futures contract, exercising it results in a long or short futures position, which is then subject to the daily marking-to-market process of the futures market. The option premium itself is not MTM daily.
Glossar
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Option Premium
Cost ⎊ The Option Premium represents the initial cost paid by the buyer to acquire the right conveyed by the contract, functioning as the price for risk transfer.
MTM
Valuation ⎊ Market-to-Market, or MTM, within cryptocurrency derivatives represents the continuous recalculation of the profit or loss on open positions based on real-time market prices, a practice critical for risk management and collateralization.