• Most equity options expire at the close of
trading on a Friday afternoon (PM-settled).
Some cash-settled indices like SPX, NDX,
and RUT expire on the open of trading on
a Friday morning (AM-settled). And some
have both AM- and PM-settled options. Friday morning or afternoon, what difference
does that make? A lot, as it turns out.
The Cboe uses the opening trade price for
each of the stocks in the index to calculate
the settlement price of an AM-settled index.
For the SPX, the index settlement has its own
symbol (SET), and is calculated with the
same formula as the S&P 500 (capitalization
weighted). But instead of using the last trade
prices for all of the 500 stocks, like the SPX,
SET uses the opening prices of the SPX’s
SIMPLE ENOUGH, BUT …
When you’re looking at the last trade prices
for 500 stocks, some of them trade many
times per second. And some may have a few
minutes between trades. But the SPX doesn’t
care; anytime one of its stocks has a trade, its
value updates. And the last trade price might
be yesterday’s closing price, if a stock hasn’t
traded since then.
The 500 stocks don’t all have their opening
trades at the same time. Some stocks trade at
the opening bell. Others may have their first
trade later. The SET waits until every stock
has an opening price, and uses those opening
prices to determine its value. So the price of
SPX at the open on Friday won’t necessarily
reflect what SET will be.
Here’s why. If a stock might be much
lower than the previous day’s close, then
the stock might not trade right at the open.
For example, maybe the market is lower on
the open, and 490 of the S&P 500 stocks
have their opening trades lower than their
previous close. SPX is lower, and uses yesterday’s closing prices for those 10 stocks.
SET collects those 490 opening prices and
waits for the remaining 10.
Let’s say those 10 are in
a particular sector, and are
much lower because of over-
night news, but they haven’t
opened yet. Say the market
rallies back, so the 490 stocks
are unchanged, SPX is unchanged, but now
those remaining 10 stocks have much lower
opening trades. Because the 490 stocks’ last
trade prices are unchanged, the SPX may
not drop too much. But SET will add those
much-lower opening prices of the 10 stocks
to the lower opening prices of the 490 to get a
value that is much lower than SPX.
So say you look at your position in an
expiring option at the close of trading on
Thursday before expiration, or even at the
open of trading on Friday. You may think
a profit is safe, or a loss is likely, because of
where SPX is. But you’re at the mercy of what
SET might be. And that risk can’t be hedged,
because those expiring SPX options can no
longer be traded.
SO, WHAT DO YOU DO?
If you have a profitable position in expiring
SPX options, you may want to close them
before the close of trading on Thursday.
Maybe you’re short a strangle that’s far out
of the money (OTM) based on SPX’s price. If
you hold the strangle, SET might be marked
much higher or lower, and turn your winning
strangle into a loser. Ouch!
Say you have a losing position—a long SPX
OTM option that has a zero bid and 0.05 ask
and is just about worthless. Maybe you hold
it as a sort of lottery ticket in case SET settles
high or low enough to make that OTM option
in the money at expiration and make its loss
smaller, or even give it a profit.
Keep in mind that closing SPX or other
index options, or going through exercise or
assignment on expiration, incurs commissions and fees.
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those
of the author and may not be reflective of those
held by TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 37, #1– 2.
On Your Mark … Get SET … Wait!
PRO • BIG IDEA: HOLDING SHORT SPX OPTIONS INTO
EXPIRATION MAY BE RISKY. HERE’S HOW TO STEER
CLEAR OF SOME HIDDEN DANGERS.