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.

I received an assignment notice for Nikkei 225 Option

Today I received an assignment notice from my broker that my short option contract on Nikkei 225 (N225) which expired yesterday, 13-Mar-2014.

Was I surprised?  Yes and No.

Yes because N225 is a cash settlement option.  So, I should not be 'assigned' to buy the Nikkei Index component stocks.  After I clarified with the broker, I need not take any action.

No because while N225 close at 14,815.98 on 13-Mar-2014 Japan time, which is about 300+ points above my Strike of 14,500,

N225 Daily as at 13-Mar-2014

SPX Daily as at 13-Mar-2014

SPX close 21.86 point down on 13-Mar-2014 US time.  So, N225 should 'crash' more than 300+ points when N225 open for trading on 14-Mar-2014 Japan time.  There is a high chance that it will hit my Strike.

For most Index options, the settlement price is the opening price on the business day following the last trading day.  N225 final settlement price is 14,429.87 (Special Quotations) on 14-Mar-2014.  70.13 points below by Strike of 14,500.  I suffered a loss of JPY 70,130 or USD 689.10 for this contract.

On the expiration day, 13-Mar-2014, I can close this N225 Mar13'14 14500/14250 Put Spread for a profit of JPY 8,600 (~USD 83.94) with a 8 Days on Trade, 11% Return on Margin (ROM).  With the full Iron Condor (including 15750/16000 Call Spread), it will be JPY 36,200 (~USD 353.34), 48% Return on Margin with a 8 Days on Trade.

I didn't.  Because it was the expiration day.  Because delta is only -0.0548.  These are good reasons to stay in the trade.

But not good enough when N225 is just 300+ away from my Short Strike.  A down day for N225 could be easily 300-500 points.

Worst still, when we are talking about a spread of 4 points, JPY 4,200 (~USD 41.27) reward that we are taking the risk.

Mark Wolfinger of "The Rookie's Guide to Options" advice not to risk another day (even on the expiration day) for a penny even when your Strike is quite far away.  You don't know what will happen tomorrow.  Michael Benlifa in his book "Profiting with Iron Condor Options" also advice to take profit when it reach your targeted ROM.

A good lesson learned.  A good experience of being assigned.  A good understanding of it is the next day opening price that matters for Index Options.