Option trade settlement date

Settlement Date.

What is a 'Settlement Date'

The settlement date is the date on which a trade must be settled and the buyer must make payment. It is also the payment date of benefits from a life insurance policy. The settlement date for stocks and bonds is usually two business days after the trade was executed; for government securities and options, it's the next business day; and in spot foreign exchange it is two business days after the transaction date.

BREAKING DOWN 'Settlement Date'

The financial markets specify the number of business days after the transaction date that the security or financial instrument will be delivered and must be paid for. The lag between transaction and settlement dates reflects the fact that settlement, which now takes place electronically, was previously done by physical delivery.

Most stocks and bonds are settled two business days after the transaction takes place, which is referred to as T+2. Government bills, bonds and options are settled the next business day. Spot foreign exchange transactions usually settle two business days after execution; the main exception is the U. S. dollar vs. the Canadian dollar, which settles the next business day.

Weekends and holidays can cause the time between transaction and settlement dates to increase substantially, especially during the Christmas and Easter seasons. Foreign exchange market practice requires that the settlement date be a valid business day in both countries.

Forward foreign exchange transactions settle on any business day that is past the spot value date. There is no absolute limit in the market to restrict how far in the future a forward can settle, but credit lines are often limited to one year.

Both parties to a transaction take on credit risk because of the time that expires between the execution of a transaction and its settlement. This is especially important in forward foreign exchange transactions, given the length of time that can pass and the volatility in the market. There is also settlement risk because the currencies are not paid and received simultaneously, and time zone differences increase that risk.

Life Insurance.

Life insurance is paid following the death of the insured, unless the policy has been surrendered before that. If there is a single beneficiary, payment is usually within two weeks from when the death certificate is provided. It can take longer if there are multiple beneficiaries who must be contacted, but most states require the payment of significant interest if there is a delay.

Options Settlement.

Options Settlement - Definition.

Options Settlement is the process by which the obligations between the holder and writer of an options contract are resolved after the contract is exercised.

Options Settlement - Introduction.

Options settlement happens when an options contract is exercised, whether voluntarily or automatically. Settlement is when the holder and the writer of the contract "settle their score" so as to speak. It is the process by which the terms stated in the options contract are carried out by both parties and one party pays the other party either for the underlying asset or for profits owing, depending on the settlement style.

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What Is Options Settlement In The First Place?

Settlement in options trading is the process where the terms of an options contract are resolved between the holder and the writer. In options trading, the holder is the one who owns an options contract and a writer is the person who sold the holder that options contract. Settlement in call options contracts involve the holders of the options contracts paying the writers for the underlying asset at the strike price. Settlement in put options contracts involves the holder of the options contract selling the underlying asset to the writer at the strike price. After settlement, the options contract will cease to exist and all obligations between the holder and the writer would be resolved.

Options Settlement Styles.

There are two main ways in which options are settled in options trading; Physical Settlement and Cash Settlement.

AAPL is trading at $210. You bought one contract of AAPL's call options at the strike price of $210 for $230.

Options Settlement - What Really Happens.

In theory, options settlement is a resolution between a holder and a writer of options but in reality, when stock options are exercised and settled in the US market, it is the Options Clearing Corporation or OCC that actually pays as your counter party. If you exercised call options that you own, it is the OCC that gives you the stock. If call options that you hold are being assigned, it is the OCC that takes the stock from your account. This happens through an Options Assignment process. Yes, the resolution of all options contracts in options trading are guaranteed by the OCC in such a manner so that you will never have to worry if "the other party" has the money or assets to fulfill their part of the contract. This is because you are really trading with the OCC instead of another trader or investor.

Do I own a stock as of the trade date or the settlement date?

When it comes to buying shares, there are two key dates involved in the transaction. The first date is the trade date, which is simply the date that the order is executed in the market. The second date is the settlement date, at which time the transfer of shares is made between the two parties. It is the settlement date, however, that marks an official transfer of ownership from the seller to the buyer. While there may be differing rules for the various jurisdictions around the world, the general view is that ownership is transferred when the funds are given in exchange for the security, which happens on the settlement date.

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However, there is little differentiation between the two dates because it is unlikely that ownership will not be transferred after the trade date. Upon the execution of the order on the trade date, an obligation arises for both of the parties involved in the order. The buyer is then obligated to provide the necessary funds (cash) to pay the seller and the seller is obligated to have the adequate number of shares to transfer to the owner. Nevertheless, there are two ways in which the settlement can fail. The first is a long fail, a situation in which the buyer does not have adequate funds to pay for the shares he or she ordered. A short fail can also occur; this is when the seller does not have the security at the settlement date.

Trade Dates vs. Settlement Dates: Why You Need to Know the Difference.

Understanding this key distinction is important for some key reasons.

The financial industry is particularly notorious for using hard-to-understand jargon. One example that stumps beginners and experienced investors alike has to do with the process that occurs whenever you buy or sell a stock or other investment. After you make a trade, you might notice on your brokerage confirmation that there are multiple dates listed, one called the trade date and the other called the settlement date. Most people never think twice about those two dates, but there are a couple of situations in which it makes a huge difference knowing how trade dates and settlement dates differ. Let's take a look at the various uses of both dates and what you need to know to avoid some nasty surprises.

Technology has turned professional investing into a game of speed, where milliseconds matter and can produce huge profits for those who get in ahead of the crowd. You can wire money around the world at lightning speed, and you can enter a trade on your computer or mobile device and have it executed less than a second later. Yet there's still an antiquated process that your broker has to follow in order to get the stocks, ETFs, and other securities you buy or sell into or out of your account, and that's where trade dates and settlement dates come in.

Of these two terms, the trade date makes more sense intuitively. It's the date on which you actually entered and executed the trade. Most investors think of the trade date as the only one that truly matters, as it's the one that you have the most control over.

New York Stock Exchange floor. Source: Wikipedia.

The settlement date, on the other hand, reflects the date on which your broker actually "settles" the trade. Technically, even though your online brokerage account will typically list the shares you've just bought among your holdings, your broker doesn't actually take the money out of your account and put the shares in until a later date. With stocks and exchange-traded funds, the settlement date is three business days after the trade date. Mutual funds and options settle more quickly, with a settlement date that's the next business day after the trade date.

Why trade and settlement dates matter.

The trade date is the key date for one very important aspect of investing: tax rules. For instance, if you want to sell a stock before year-end in order to take advantage of a tax loss, then the trade date has to be Dec. 31 or earlier. So as long as you get that trade executed before the market closes on the last day of the year, it doesn't matter that the settlement date comes later. Also, when measuring how long you've owned a stock to determine whether a gain is short-term or long-term, you'll use the trade date to measure your holding period.

Settlement dates matter because of funding requirements from your broker. Some brokers will let you buy stock even if you don't have enough money currently in your account to pay for the shares, relying on you to deposit cash at some point between the trade date and the settlement date to cover the cost of the stock. Having the settlement-date lag can actually be helpful from a liquidity standpoint.

But the Securities and Exchange Commission also pays attention to settlement dates, and it has rules that can trip up investors who aren't mindful of those dates. If you have a cash brokerage account, then the SEC requires that you have enough available cash to pay for the purchase of any stock before you sell it. Otherwise, you're engaged in what's called "free riding" and violating the Federal Reserve's rules on extending credit to brokerage customers. To avoid violating the rule, you have to wait until the trade settles, and then you can sell the stock you bought.

For most investors, trade dates are the most important aspect of when you buy or sell a stock. But occasionally, settlement dates have a big impact. Knowing the difference can help you be smart about your investing and stop you from getting into unexpected trouble.

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