This article is part of the series

How PM Settlement May Impact SPX Options

Options Trading TradeKing

Mark Wolfinger fields a question from an SPX trader in the TradeKing forums

What difference does a shift in settlement time for your favorite option - in today's example, SPX - make? TradeKing client Doogle asked in the forums lately:

Interesting that it's (SPX pm) electronically traded and not open outcry.  I wonder if the spread will be tighter than SPX.  I wonder if SPX will lose significant volume. What difference do you think the PM settlement will cause?

Doougle,

PM settlement should not result in any major changes in how the options trade. We already have at least three SPX Weeklys options per month (all except for the 3rd Friday), and they all offer the advantages of PM settlement. 

(Doogle is already familiar with how SPX options trade and the concepts mentioned above, but those readers who aren't: check out Brian Overby's post Weekly Options: Every Week is Expiration Week. Then follow that read with Brian's post Weekly Options Shift to PM Settlement. In a nutshell, weekly options are listed and then expire every week instead of having the typical lifespan of three to nine months. That introduces interesting potential ways to profit but also creates a significant risk: because expiration is always around the corner, these options have very high gamma. In other words, if an option that was sold short becomes in-the-money, its value will increase very quickly - bad news for traders who sold the option. These options sellers face considerable risk, because of the high gamma or "acceleration factor" that comes with options that expire so quickly.)

I do expect that volume will slowly transfer from "regular" AM-settled SPX options to the much more reasonable approach of PM settlement. The major difference is that no one is subject to the risk of a morning gap, such as those we have experienced for some AM-settled options. This new product is long overdue and is far superior to current SPX options (in my opinion, at least). 

Combine that with the quick fills available from electronic trading, and PM settlement options offer quite a few advantages over the old AM-settlement variety. I’ve avoided them previously due to the excruciatingly wide bid/ask spreads coupled with slow fills, but this change should remedy that. In my opinion, any trader who understands the risk-reward profile of SPX options, and can accept those limitations, should give SPX options a closer look.

My only concern is that some people may refrain from trading SPX options because they don't appear to originate from the regular CBOE trading floor. Instead this new product trades on the CBOE’s C2 platform. Why should this matter? It shouldn’t. However, some people may see the term “C2 platform” and not understand that this, too, is a reliable way to trade. I don't believe this will make much difference in the trading action either way.

  

Regards,

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options available at http://www.tradeking.com/ODD.


Mark Wolfinger does not currently hold a position in the securities mentioned above. 


Online trading has inherent risk due to system response and access times that may vary due to market conditions, system performance, and other factors. An investor should understand these and additional risks before trading.

While Gamma represents the consensus of the marketplace as to the theoretical rate of change of Delta relative to the underlying security there is no guarantee that this forecast will be correct.

All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.


TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders and who provide timely market commentary via the TradeKing All-Star blog at  http://community.tradeking.com/members/tk-all-star/blogs. Each All-Star commentator’s bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star blog roster, available at  http://community.tradeking.com/members/tk-all-star/details. The selection of All-Stars commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators on TradeKing.com. Supporting documentation for any claims made in this post will be supplied upon request by the author of the post, Mark Wolfinger, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image.

Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to potentially invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs. 

Mark Wolfinger maintains a business relationship with TradeKing.

Continue Reading Below

What do you think?

Click the button below to comment on this article.