[TheOptionClub.com] Re: Index Settlement Values

 

Chris,

You are completely right. I didn't fully understand it, but neither did the broker that I first spoke to. He had to check with the options desk!

Also, when do we ever fully understand something? It's by doing it, and experiencing stuff like this.

I did understand that the SPY is an ETF and this is an Index, but I didn't realize the closing price isn't the final value!

This is some what scary as how do you really know what you are getting into or how can you manage your risk if it's some completely different number based on some random calculations.

I have read the book options volatility and pricing, so it's not like I'm completely jumping in without knowing anything.

I had a short strike SPY at 117, and it wasn't assigned, because it's not an index. However, maybe it's worth it to pay the extra commissions than to trade the SPX.

Or, like you said, I learned a good lesson and I should have listened to what that one trading club said and don't hold until expiration, and get out the week before because of the vega. They were right, and I learned that first hand. Even though they all expired worthless, I saw the value of the option jumping by 30% in one day on the SPY and SPX!

Thanks

--- In OptionClub@yahoogroups.com, "TheOptionClub" <chris@...> wrote:
>
> It is true. You made the rookie mistake of trading a product you did
> not fully understand. In this case you did not appreciate the way in
> which settlement occurred.
>
> Settlement on options for cash indexes like SPX and RUT are based upon a
> calculated settlement value that is not related the daily print for the
> index. In fact, over the years I have seen settlement values for the
> indexes fall wholly outside of the index's daily range.
>
> The method of calculation varies depending upon the index. If you
> intend to trade a cash index, you should really spend some time over at
> the CBOE website reading about the individual product so that you better
> understand what it is that you are trading.
>
> For what its worth, my experience has convinced me that holding
> near-money short options on these cash index products through expiration
> is so dangerous that I simply will not do it and am careful to close all
> short options out no later than the Wednesday of expiration week.
>
> Christopher Smith
> TheOptionClub.com
> --- In OptionClub@yahoogroups.com, "metagunny" <justin@> wrote:
> >
> > Part of my iron condor one of the short strikes on the SPX was at
> 1170.
> >
> > I thought I was home free and it expired OTM last expiration.
> >
> > I log into my account today, check out the gain\loss, and it shows it
> was excercised, and I had to buy it at 1172.95 and sell the shares at
> 1170.
> >
> > I call up my broker today, ask him how it was excercised if it was out
> of the money at expiration, and he had me go to the CBOE site, and check
> out the Index Settlement Value section at
> http://cboe.com/data/Settlement.aspx
> >
> > So, the actual price of the SPX closed at 1159.90 on the 19th, opened
> at 1157 on the 22nd, closed at 1165 on the 22nd.
> >
> > That is a pretty big gap of almost 10 points, but yet I lost money on
> the trade and had to buy at 1172.95
> >
> > He mentioned something about not all stocks in the S&P 500 start
> trading right away, so they take a random sampling to get the index
> settlement price.
> >
> > If you didn't know about this, just a warning.
> >
> > Is this the real story? I believe my broker if it's on the CBOE's
> site, and the price matches exactly.
> >
> > Is this correct?
> >
>

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