To settle a stock index option, the exchange-assigned option writer:
A) Delivers all the stocks that make up the index.
B) Pays cash to the option buyer.
C) Takes an offsetting position.
D) Lets the option expire worthless.
E) None of the above.

Question

Quizplus · Accepted Answer

Stock index options are typically settled in cash, not by delivering the actual stocks that make up the index. This means the option writer pays the option buyer the difference between the strike price and the actual index level at expiration, if the option is in the money.

To Settle a Stock Index Option, the Exchange-Assigned Option Writer