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What is the most common procedure when options/futures/forwards are held until expiry? Will the underlying asset be delivered in a physical way or will the value of the derivative be exchanged as a cash amount? Are there differences between stocks, commodities or other securities?

  • It depends on the contract. – Robert Longson Apr 27 '20 at 15:50
  • So it is specified in the contract? Do you know which kind of settlement is more common? – elemenope Apr 27 '20 at 16:02
  • There are thousands of kinds of contrats. Even with a single kind e.g. oil futures it depends on the contract. The recent debacle with Oaklahoma oil futures was because of physical delivery but Brent Crude is cash settled. – Robert Longson Apr 27 '20 at 16:05
  • Generally options and forward contract are settled in cash on expiry, depending on the value. Futures are generally for delivery, and one has to take delivery else pay for warehouse and auction charges – Dheer Apr 27 '20 at 16:20
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I'll address the equity/index options aspect of this.

If an option is one cent or more ITM at expiration, the Option Clearing Corp (OCC) will automatically exercise your options whether they are long or short. This is called Exercise by Exception.

For American style equity/ETF options, you will end up with a position in the underlying (long or short). European style options (most indexes) are cash settled.

If you are long the option, you can designate to the OCC via your broker that your options are not auto exercised at expiration. This would make sense if they are ITM by pennies and your commission to close the position exceeds the ITM amount.

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