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Options Trading

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?


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.



Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options available at

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.

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