Cash delivery is essentially a settlement system when an underlying futures contract expires or has been exercised. Investors who make use of these deals are called speculators since their objective is to secure against price movements not own the underlying physical commodity. This form of investing has been around for some time and is gaining more acceptance as a result of the volatility in financial markets. In recent times, the internet has allowed investors to place their orders online thus eliminating the need to physically visit any one brokerage. Most online brokerage firms offer this service, but some do not.
When an investor decides to cash delivery, they first determine the price to pay for the underlying instrument. Once this is established, they then obtain the quote for a similar instrument. The quote includes a profit figure that is less than the current market price and a strike price. If the quote is higher than the strike price, the investor decides to purchase the futures contract. However, if the quote is lower than the strike price, they decide to sell the futures contract. When the investor decides to cash delivery, they do not take delivery of the commodity itself, but they do guarantee a payment if the option contract expires before the end of the month, the expiry date on the futures contract or the expiry date on the equity futures contract.
Once the order is placed and the commodities or equity futures contract is purchased or sold, the investor then makes the payment online, usually through a credit card. The payment is made when the underlying asset, the contract or the equity futures contract expires or has been exercised. This ensures that the buyer of the option will receive the full amount stated in the option. The trader will have made cash delivery when the option’s contract expires or has been exercised.