SPX Weeklys Options

No, it’s not a spelling error. The CBOE refers to these short-term options as ‘Weeklys.’

Last night, a simple question from a reader resulted in my first learning about something that has been going on since early December 2010. To me it’s gigantic news. However, when I googled, I found almost nothing.

My correspondent is short the SPX Feb 1290/1300 Put spread. Here’s the key line from that e-mail:
“I wonder whether it is a good idea to close the deal Thursday evening?”

Yes, it’s a good idea

I’ve cautioned traders (many times) that it’s foolish to take the risk of holding OTM index option positions overnight – when settlement is determined by the next day’s opening prices. Thus, I’m a big fan of closing Thursday.

I took a quick look at the (CBOE Micro site for Weeklys), just to be certain that I was not missing anything in my reply – when I discovered a few innocent looking lines:

NEW – SPX Weeklys Now PM Settled

On Thursday, December 2, 2010, CBOE commenced trading of PM-settled End-of-Week (“Week-Ends”) SPX Options for expiration on Friday, December 10, 2010. With the commencement of trading in PM-settled End-of-Week SPX options CBOE discontinued the listing of SPX AM-settled Short Term Options. For additional information please refer to the following circular https://www.cboe.org/publish/InfoCir/IC10-174.pdf

I’ve argued for a long time that A.M. settlement is a very unfair method for determining the ‘final closing price’ for any index. There is too much opportunity for market manipulation. Thus, this change is a good thing and makes it a more viable product for trading.

Naive me, I like to believe that exchanges should not offer products designed to confuse the small investor. Sure, that small trader represents a tiny portion of the exchange’s business, but there are exchange-traded products that have no reason to exist, other than to generate large fees for the product’s inventor. [Leveraged ETFs are a perfect example. They are designed to lose value over time, and too few people are aware.]

But, I digress.

There is never any excuse for trading options, or any other product, without a complete understanding of the rules. However human nature makes too many people believe they understand, or assume there’s no reason to look into the details. They believe it’s obvious.

Today’s correspondent still believes that the Friday ‘opening price’ of SPX represents the settlement price. He had no idea that the true settlement price was not the ‘opening price,’ but is a theoretical price based on the opening price of each individual stock in the specific index – regardless of the time at which that opening trade occurs. It’s always an imaginary price and very often bears little resemblance to the published opening price. Big price changes can occur between Thursday’s close and Friday’s opening.

However, he tells me he lost money one time and could not understand the reason. He never asked anyone (as far as I can determine) how that happened. It’s as simple as this: He was short all day Friday. He thought his options had expired, or settled at the opening, when in fact they did not settle until the end of trading that day.

Can you imagine holding a short call credit spread in a rising market – and not knowing that you have the position? I have a lot of sympathy because the rules were changed in the middle of the game. He truly had no idea that the options were live. But, whose responsibility is this? Surely the trader must understand what he is trading. Plus I find it difficult to believe that his broker had not notified him of the new rules.

On the other hand, rules are rules and when a major change – and in my opinion, this is a HUGE change – occurs, shouldn’t someone exercsie great care to see that everyone who has an open position in these options is alerted to the news? I must admit that I was unaware. However, as a non-trader of Weeklys options, there was no reason for my broker to alert me. Neither did I read about this story.

So I ask, am I the only person who believes this is a big deal and that the CBOE blew it as far as spreading the word? Or did my correspondent and I just miss the well-publicized news?

911

,

8 Responses to SPX Weeklys Options

  1. Jeff 02/24/2011 at 11:46 AM #

    I don’t trade SPX – only SPY, but I do trade weeklys. However, I do read several trading blogs and news services, particularly on options. I did not hear one thing about this change. I agree with you that CBOE dropped the ball.

    By the way, thanks so much for your blog. I’ve learned more about options from your blog than all the others I follow combined.

    • Mark D Wolfinger 02/24/2011 at 1:33 PM #

      Jeff,

      Thank you.

      Amazing isn’t it? you would think that the people who did not know would sue en masse.

  2. Pete 02/24/2011 at 1:23 PM #

    Mark, I checked with TOS. While the weekly SPX does have Friday PM settlement, The Monthly series still has Friday AM settlement prices. There is no weekly, or short term series which expires the third Friday of each month. If one is regularly trading the short term series you need to remember this difference.

    • Mark D Wolfinger 02/24/2011 at 1:34 PM #

      Pete,

      Agree. Only the Weeklys changed settlement. But they did almost secretly.

  3. Satish 03/06/2011 at 1:31 PM #

    I checked with Trademonster about SPX settlement.

    I was told that regulars (in my case FEB 18th expiry) are AM settled.

    I asked them about recent COBE changes, I was told that it is “proposed”. Nothing is final yet.
    So where is the truth???

    I sold 10 contracts of 1340/1345 on 16th Feb with 2-1/2 days remaining. On Friday morning, my positions showed $-2210. All my attempts to make any changes were rejected.

    Mark, can you please contact Trademonster and ask them whether SPX are AM settled or PM settled? Also get the name and phone # of the person.

    • Mark D Wolfinger 03/06/2011 at 2:10 PM #

      Satish,

      tradeMONSTER seems to be in its own little world. I don’t understand why that is. From the CBOE:

      a) “CBOE’s Weeklys options are currently listed on Thursdays and expire the following Friday. New Weeklys are listed each week except that no new Weeklys are listed that would expire during the expiration week for regular options (the third Friday of each month).

      b) “On Thursday, December 2, 2010, CBOE commenced trading of PM-settled End-of-Week (“Week-Ends”) SPX Options for expiration on Friday, December 10, 2010. With the commencement of trading in PM-settled End-of-Week SPX options

      c) There are also quarterly options that expire on the last trading day of March. According to the CBOE: “XSP Quarterly Options are series of options based on the Mini-SPX Index that expire on the last business day of each calendar quarter. XSP Quarterly Options are PM-settled; that is, their exercise settlement value is based on the closing level of the Mini-SPX Index on the day the options expire.”

      Where is the truth? I trust the CBOE – the people who list and trade those options. I do not trust the ignorant customer service representative who gave you mis-information.

      No, I cannot take the time to make a telephone call for you.

      Regards

  4. akcje 08/19/2011 at 5:56 PM #

    There is even more confusion with SPX options. Perhaps intentional.

    I have assumed that last trading day of options is a day before the expiration.
    But just learned the hard way that the SPX calls with expiry on Saturday 8/20/2011
    had the last trading day on Thursday…
    The problem is that the last day of trading is hard to find. Brokers like Schwab hide it.
    CBOE web site likewise, shows the expiration on Sat but not show the last trading day
    which is two days before!

    BTW, the broker told me it is settled in the morning…

    egz:
    http://www.cboe.com/DelayedQuote/DQBeta.aspx?content=http%3A%2F%2Fdelayedquotes.cboe.com%2Fnew%2Findices%2Fquote.html%3FASSET_CLASS%3DIND%26ID_NOTATION%3D8941848

    • Mark D Wolfinger 08/20/2011 at 10:37 AM #

      I’d hate to believe it is intentional, so I will not pass judgment.

      You made a mistake to assume anything. However, I sympathize becasue there is no reasonable way for you (or any new trader) to know the rules and there is no reason for you to expect that something is going to be out of the ordinary.

      There are now two different SPX options.

      The WEEKLYS settle at the end of the day on Friday, per your expectations.

      However, the ‘OLD” SPX options – and those are the ones that settle on the THIRD FRIDAY of the month – do stop trading Thursday afternoon and are settled on Friday morning, using the opening prices of each of the individual stocks that comprise the index. This is the way index options have always been trading. The WEEKLYS are new and different. Be aware that RUT also stops trading Thursday afternoon and settles Friday morning.

      Your broker was right – but should have told you about the difference with the WEEKLYS.