The third Friday of the month in March, June, September and December is known as “triple witching” in which stock options, stock index futures and stock index futures options all expire simultaneously. SPX (S&P 500 Index) options expire and settle differently but a lot of money can change hands because of these expirations too. Is this a trade opportunity for us or should we stay away?
Standard equity options are subject to “American Exercise”. That means the owner of the option can exercise at any time before the option expires. SPX options though can only be exercised on the day of expiration. This is known as "European Exercise. Perhaps a larger difference is the settlement process. SPX options are settled in a non-standard way. The options stop trading Thursday but are not settled until Friday morning. The opening print from all the stocks in the index are taken to calculate the price. Any existing option positions are then Cash Settled. This “Special Opening Quotation” is known as SET.
Because of the difference in settlement and trading and the overnight time factor there can be a huge difference between where the SPX is when the options stop trading and the SET price. There is no way to predict whether the SET will be higher or lower or by how much. The only thing that is known is that it is highly likely there will be a difference. This is like betting on red or black at the casino except you have no idea how much you can make or lose. We prefer high probability trades. Expiring option positions in the SPX should either be exited or rolled.
For more information on SET see:
Market Measures from September 26, 2014: “S&P 500 (SPX) Options Settlement”
Market Measures from June 18, 2015: “SET | Trading Through SPX Settlement”
Market Measure from November 18, 2015: “Avoiding Trouble With SPX Settlement”
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the important takeaways and a firm understanding why we never hold onto SPX positions through expiration.
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