Understanding Physical Delivery in
Derivatives Trading
Physical delivery refers to the
actual transfer of the underlying asset—such as stocks, commodities, or
bonds—when an options or futures contract reaches its expiration. Unlike cash
settlement, where only the profit or loss is settled in cash, physical delivery
involves delivering the real asset as specified in the contract.
1. What is Physical Delivery?
At contract expiry, the seller is obligated to deliver the actual underlying
asset to the buyer, as per the terms of the contract.
2. Types of Underlying Assets:
* Stocks: Shares of publicly traded
companies
* Commodities: Physical goods like
gold, oil, or agricultural products
* Bonds: Debt instruments issued by
corporations or governments
3. Specified Delivery Date:
This is the date by which the actual asset must be delivered, as outlined in
the contract.
4. Physical Delivery vs. Cash
Settlement:
* Physical Delivery: Involves
transferring the actual asset between buyer and seller.
* Cash Settlement: Only the price
difference is paid out in cash—no asset changes hands.
5. How the Process Works:
* Futures Contracts: Upon expiry,
the seller delivers the asset, and the buyer pays the agreed contract price.
* Options Contracts: If exercised:
* For call options, the seller
delivers the asset to the buyer.
* For put options, the buyer
delivers the asset to the seller.
6. Common Use Cases:
* Hedging: Commodity producers or
consumers may use physical delivery to lock in prices and protect against
volatility.
* Investment: Some investors prefer
receiving the actual asset, especially in the case of commodities or stocks.
Example Scenarios:
* Gold Futures: An investor holding
a gold futures contract to expiration may receive physical gold, if specified.
* Stock Options: An exercised call
option for 100 shares will result in the buyer receiving those 100 shares if
physical delivery is applicable.
Note: At 5Paisa, physical delivery is available only in equity derivatives.
For more details, visit the 5Paisa Help Center or speak with a support
representative.