What Is the Concept of Option Expiration and Its Settlement Types?

Option expiration is the final date on which the option contract is valid and can be exercised. Upon expiration, options are settled in one of two ways.

Physical settlement requires the actual delivery of the underlying asset (e.g. shares of stock) if the option is exercised. Cash settlement involves the payment of the intrinsic value in cash, with no physical exchange of the underlying asset.

Most index options and some commodity options are cash-settled.