Because not all option investors want money. Some REALLY do want the underlying, for dividends, future appreciation in value beyond the expiration of the options and etc. If you don't want the physical settlement, you can always close your position like what they do with futures.
The index options are cash settled and of European Style. IMO both of these properties should be freely choseable by the trader. And: you can close early (this is not early exercise) if you don't want the underlying stock.
It doesn't protect you. You can get assigned overnight if a huge drawdown/spike. You can get exercised at any time, not just deep ITM...yes I know it makes no sense if there is still extrinsic value but with dividends, earnings, insider news of a takeover etc it can happen. If assigned you can be left un-protected if the price finished in the middle of your strikes rendering the protective option OTM and useless. Too many factors make it too risky imo. How about this scenario? You are short 1 100/99 put contracts of ABC. It closes @ 99.50 so short put ITM but your long strike is otm. You end up getting assigned 100 shares with no protection, and getting a margin call. 100 shares of spy is like 50k. If the price goes down in the premarket (and you know it will) you could get screwed further before you get to sell your position. Worse yet if you sold calls because now you are short and no end in risk. With all this added risk compared to cash settled one would think the premiums would be higher for non-cash settled options.
Yes, American Style is shaet, I already told this to this audience here a few days ago... As said above, the trader should have the choice to pick the options style as well the settlement type that he wishes in the trade. And it should always be possible to freely choose the preferred one. Will surely take 100+ years till the SEC & Co finally wake up.
That kind of nonsense would make covered calls sound normal/rational!!??? WXY, come to the dark side. Bring order to The Galaxy!!
That's why you don't do what's shorting options naked, namely shorting options without cash or physical assets there in case you get assigned. Shorting options naked is dangerous whether it's cash settled or with physical settlement.
If grandma had wheels she would have been a bike. Probably they wouldn't be called options if they were suited for each individual gambling need. It would defy the definition of stock/futures options. If you guys ever looked at it.
A spread isn't shorting options naked...except for the scenario I put out where the price finishes between your strikes. The difference is Cash settled options are defined risk trades...you can only ever lose the difference in spread minus the premium received. Non-cash settled options are not defined risk because of the risk of assignment.