Today, on this segment of "Market Measures", Tom Sosnoff and Tony Battista examine the SPX settlement process and explain SET.
The options on equities derive their expiration value from the closing price of the stock on expiration Friday each month. Cash-settled indices such as SPX derive their value from the SET process. This segment explains that process and gives the results from two studies that indicate whether we should exit an options position in SPX and on Thursday's close or hold through the Friday settlement.
The first study showed the difference between the SPX close on Thursday and the SET on Friday morning. The study showed a clear trend in whether the SET was higher or lower than the Thursday close. The study also revealed the average move and largest move for both possibilities.
The second study analyzed a one standard deviation strangle placed on the first day of each month. The study measured the Profit/Loss (P/L) on Thursday's close and Friday's SET. The tastylive study revealed the overall P/L for both Thursday's close and the SET, the percentage of winners for both, the biggest loss for both, and the average P/L for each choice.
The SPX options settle to a value called SET on expiration Friday morning and the SET value can differ significantly from where SPX closes on Thursday.
Watch this segment of "Market Measures" with Tom Sosnoff and Tony Battista to answer the question of whether cover a profitable trade in the SPX on the Thursday of expiration or to wait for the Friday settlement (SET).
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