What is the difference between cash settlement and physical settlement in Options?

In Options trading, cash settlement is when the payment of the difference between the market price and contract price is made in cash.

Physical settlement means that when your Futures & Options (F&O) contract expires and you still have an open position, actual shares (the underlying asset) are either delivered to you or taken from you — depending on whether you were buying or selling.

For example, if you have a buy position at expiry, you’ll need to pay the full amount and the shares will be credited to your Demat account. On the other hand, if you have a sell position, you’ll have to deliver the shares from your holdings.

This is different from cash settlement, where no shares change hands — only the profit or loss amount is credited or debited in cash.