This segment reveals the results of a study on SPX settlement and the results demonstrate why it is smart to avoid the danger of options settlement in SPX options. You need to be aware of these dangers.
A graph of the SPX and its average traded daily volume from 2011 to present was displayed. This cash settled instrument has huge volume and is very popular with institutional traders
A table showing the differences in settlement between the SPX options called SET and normal equity options was displayed. Normal equity options settle to the closing price of the underlying stock and is P.M. settled. The SET is derived from the opening price of all the SPX components and is A.M. settled.
Many uninformed traders assume that since P.M. settled options expire to the closing price of a stock that A.M. settled options also expire to the opening price. That isn’t true. Our study took 5 years of data and examined the SPX opening price on expiration versus the SET. A table of the difference between the SPX open price and the price of SET (SPX settlement price) was displayed. The table included the average, median and largest point difference between the two.
A graph of the point difference between the SPX open and the SET at expiration from 2011 to present was displayed. The graph showed that in 47% of the expirations, the difference between the SPX open and the SET was greater than 5 points. That’s serious risk for a questionable reward.
Tom and Tony mentioned the one situation in which holding through expiration might be a good idea. Watch the segment to find out.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways and other important information about holding SPX positions through settlement and the dangers thereof.
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