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Do Not Trade Index Options When You Don’t Know the Rules

In response to yesterday's post about a friend you was assigned early on a 4-lot, I received a VERY disturbing reply at approximately 5PM (ET) yesterday – Thursday Dec 17. 

Here is the reply in it's entirety:

A better Christmas gift was the 22k I made today when my CTM (1055-1075 / 1125-1145) SPX IC expired OTM! 

I can understand the happiness in the anonymous (unless his name really is John Doe) comment – despite the gloating attitude.

But the fact that John believes his options have expired makes me very upset.  How can this happen?  How can anyone have so much money at risk and not understand the rules of the game?

Here's my reply:


John Doe,

You are under a VERY serious misconception.

1) Your CTM spread is still CTM.  And will remain that way until after the market opens today.  Today is expiration Friday (technically the options expiration date is tomorrow) and today is the day that the final SPX closing price for the December expiration cycle is determined.

2) I agree that your position seems reasonable and the chances that your options will indeed expire worthless are decent.  But your options have not expired; the settlement price for SPX has yet to be determined; and it is still possible to lose the maximum amount, or $2,000 per iron condor.

3) Settlement price (symbol = SET) is calculated from TODAY'S opening price for each of the 500 stocks in the index.  When each of the 500 opening prices is known, then SET is calculated as if each stock were trading at its opening price at the same time.  In other words, SET is not a real price.  You never see an SPX quote at that price.  But it's the ONLY SPX value that is used to determine which options are in, at, or out of the money.

If you get a quiet opening, you will come out okay.  If the market gaps, you will not immediately know your fate.

4) That calculated price, SET, will not be announced until approximately
1PM ET tomorrow.  Many times, bewildered, inexperienced index option traders believe they have escaped unscathed, only to discover they have a large loss resulting from a Friday morning gap. 

SET is
OFTEN much higher or lower than the opening SPX print.

5) I hardly consider this to be a Christmas gift. To me, you are taking an incredible risk.  And what makes that so terrible is that you have no idea your options are still very much alive. 

How can you trade without knowing how European style options are settled? How is that possible?  Did you know that you were trading European options?

I don't know if I am more upset with you, your broker, or the world of options education that allows you to play the game when you don't know the rules.

At Options for Rookies, I've posted about this problem and its importance.


Having vented my frustration at I know not whom, John posted another comment assuring me that he knows what he is doing.  And I'm sure he does.  He was merely a bit premature with the expiration.  I see no reason to cancel my comments, so they remain as a warning to others.


ADDENDUM:  All's well that end's well, but I still find the play too risky for me.  Congratulations to John Doe on his winning trade.


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