Friday, March 21, 2014

SPX Settlement Risk

SPX close at 1872.01 on Thursday, 20-Mar-14.

If you have a Short Call at 1885 or 1890 with ProbITM of 5.68% and 2.23% respectively (Delta of 0.06 and 0.02 respectively), you would have thought it was quite safe that your Short Call will not be hit or exercised.

However, SPX Settlement Value (SET) is 1893.30 on Friday, 21-Mar-14, despite SPX close at 1866.52.

Both Calls Strike price of 1885 and 1890 are all hit!  Your Call option contracts didn't expire worthless as expected.  They will be exercised!

This is a good real life illustration of Settlement Risk.  To avoid such Settlement Risk, we need to have 50+ points cushion between SPX price and short options's strikes.  Or simply close the position before expiration.  The last few pennies is just not worth the risk.

SPX Contract Spec

Expiration Date:
Saturday immediately following the third Friday of the expiration month until February 15, 2015. On and after February 15, 2015, the expiration date will be the third Friday of the expiration month.

Last Trading Day:
Trading in SPX options will ordinarily cease on the business day (usually a Thursday) preceding the day on which the exercise-settlement value is calculated.

Settlement Value:
Exercise will result in delivery of cash on the business day following expiration. The exercise-settlement value, SET, is calculated using the opening sales price in the primary market of each component security on the last business day (usually a Friday) before the expiration date. The exercise-settlement amount is equal to the difference between the exercise-settlement value and the exercise price of the option, multiplied by $100.

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