Physical delivery is a term in an options or futures contract that requires the actual underlying asset to be delivered upon the specified delivery date rather than being settled with offsetting contracts. Here’s a more detailed explanation:

1.     Definition: Physical delivery means that, upon the expiration of the contract, the seller must deliver the actual underlying asset (such as stocks, commodities, or bonds) to the buyer.

2.     Underlying Asset: This could include:

o   Stocks: Shares of a company.

o   Commodities: Physical goods like gold, oil, or agricultural products.

o   Bonds: Debt securities issued by corporations or governments.

3.     Specified Delivery Date: The date on which the actual physical delivery of the asset must take place, as defined by the contract.

4.     Difference from Cash Settlement: Unlike cash settlement, where the difference in the contract price and the market price is paid in cash, physical delivery involves the transfer of the actual asset.

5.     Process:

o   Futures Contracts: At expiration, the seller delivers the physical asset to the buyer, who must pay the agreed-upon price.

o   Options Contracts: If exercised, the writer (seller) of the option must deliver the asset to the holder (buyer) for call options or vice versa for put options.

6.     Use Cases:

o   Hedging: Producers or consumers of commodities use physical delivery to hedge against price volatility.

o   Investors: Some investors prefer physical delivery to ensure they receive the actual asset.

Example Scenario:

·        Commodity Futures: An investor holding a gold futures contract that specifies physical delivery will receive the physical gold upon contract expiration if they hold the contract until then.

·        Stock Options: An investor with a call option on 100 shares of a company that exercises the option will receive the 100 shares if the contract specifies physical delivery.