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Allowing Options to Expire
- Thread starter i005890
- Start date
Yes, assuming the index settlement price is below 520 tomorrow you will get the full 10 points. The problem is that the index is definitely within striking range and with GOOG earnings coming out after the close today, I'd assess whether the extra 1.5 or so(you should be able to sell the spread for around 8.5 based on current quotes) worth taking on the risk of holding thru expiration and potentially having the index settle at 525 or even higher.
Quote from i005890:
I have a long Jul 530/520 put vertical on RUT. Other than the risk that RUT moves above 520 and cuts into my profit, why should I not just let this expire? Won't I get the full $10 if I do?
You do understand what MTE told you - right?
Today's closing price on RUT is irrelevant. Only tomorrows settlement price is of importance to you.
That quote is RLS and it will NOT be available until very late in the day tomorrow.
Mark
As of the minute I am writing this the RUT is at 517. That is only three points away from the critical 520 mark. As MTE and Mark correctly pointed out, the opening prices tomorrow (what is called the opening print calculated by the exchange) are the critical factor that determines how much you will receive. This number is usually very close to the index value quotes you would see if you check the prices with your broker in the morning tomorrow.
However, I have had an unpleasant experience with this once, and it did cost me real $$. There is a sinking feeling that is hard to describe as you watch the futures move toward your short strike, knowing that the market is 99% likely to get its initial direction from the futures in the morning. Unless you have a futures account with lots of margin available, there is nothing you can do to prevent or respond to this adverse movement!!
With the RUT this close, I'd advise taking your profits, unless you can protect yourself with futures. It would be a shame to have a gap up in the morning wipe out all your gains.
However, I have had an unpleasant experience with this once, and it did cost me real $$. There is a sinking feeling that is hard to describe as you watch the futures move toward your short strike, knowing that the market is 99% likely to get its initial direction from the futures in the morning. Unless you have a futures account with lots of margin available, there is nothing you can do to prevent or respond to this adverse movement!!
With the RUT this close, I'd advise taking your profits, unless you can protect yourself with futures. It would be a shame to have a gap up in the morning wipe out all your gains.
Quote from JohnGreen:
As MTE and Mark correctly pointed out, the opening prices tomorrow (what is called the opening print calculated by the exchange)... This number is usually very close to the index value quotes you would see if you check the prices with your broker in the morning tomorrow.
there is nothing you can do to prevent or respond to this adverse movement!!
I'd advise taking your profits, unless you can protect yourself with futures.
It is called the settlement price. It is not called 'the opening print as calculated by the exchange.'
The number is often VERY DIFFERENT from the opening prices you see quoted.
Where do you get your information? And more importantly, why do you think it's a good idea to spread mis-information?
Next: to OP:
Yes, there is something you can do.
Please, please do NOT protect yourself with futures - unless you love taking massive losses when the market reverses. You can protect yourself by simply selling the spread. Or, you may buy the 520 calls.
If you buy the 520 calls and sell the 530 calls, that's exactly equivalent to selling out your position, so I see no need to do that. But buying a small number of 520 calls is a much safer way to protect your investment than buying futures.
Mark
Quote from JohnGreen:
As of the minute I am writing this the RUT is at 517. That is only three points away from the critical 520 mark. As MTE and Mark correctly pointed out, the opening prices tomorrow (what is called the opening print calculated by the exchange) are the critical factor that determines how much you will receive. This number is usually very close to the index value quotes you would see if you check the prices with your broker in the morning tomorrow.
However, I have had an unpleasant experience with this once, and it did cost me real $$. There is a sinking feeling that is hard to describe as you watch the futures move toward your short strike, knowing that the market is 99% likely to get its initial direction from the futures in the morning. Unless you have a futures account with lots of margin available, there is nothing you can do to prevent or respond to this adverse movement!!
With the RUT this close, I'd advise taking your profits, unless you can protect yourself with futures. It would be a shame to have a gap up in the morning wipe out all your gains.
Futures won't do you much good. The settlement value is calculated off of the opening print of each individual stock in the index and it can be dramatically different from the opening index value, futures and it can even be several points higher than the high for the day or lower than the low.
As of now, RUT is at 520.
Mark-- I'm pretty disappointed in your reply, frankly. This is NOT a case of calling a put a call or a radical error in judgment and does not deserve the kind of reaction you responded with. I'm definitely NOT a rookie trader, and you should know that already since I have participated in numerous discussions with you here on elitetrader, and have generally agreed with most of your positions as being wise and sensible.
I stand by my comments based on my experience. Admittedly, I don't trade the RUT, but based on my experiences with SPX and NDX, most of the time the differences between the settlement price (which IS calculated from the opening prints for each stock-perhaps my terminology was a bit off, but my understanding is NOT) and the quotes you see on your broker's screen at the market's open ARE relatively small. With the RUT, the differences may be somewhat larger occasionally due to the fact that many small company shares trade with less frequency and volume.
Second, IF you read my comments carefully, you will note that there was a warning based on my own experience. I know EXACTLY what can happen!! I also gave some very specific advice in there to close the position without access to protection from the futures. Read my comments again, and you will see that this is so.
Third, you CAN more or less protect yourself with futures contract overnight, although it will probably require a long night looking at the screen, and perhaps some trading losses and commissions costs if whipsaws occured. I do understand how to do this effectively, but generally it would not be worth it to lose a night's sleep unless the dollar amounts were quite large. In the scenario that would generate large losses to the OP, however, the protection would be very effective. If the RUT futures were to rise past 530 overnight ( on a fair value basis) in a relatively steady fashion, the protection afforded by the futures would be close to complete. In rare cases, it could actually be profitable on a net basis. Admittedly, this isn't the perfect solution, but it would be MUCH superior to watching helplessly!! Don't you agree?
Finally, I admit that I rarely hold positions into the settlement process, and would NOT hold this RUT position overnight with it being so close (as I advised). Usually, I close my positions before expiry week for 0.15 or so if they are credit spreads, or roll them out. Debit spreads that are OTM can be held into expiry if they are protecting credit spreads for the next month without major concern since they can help you if the market gaps into the position overnight.
I trust this clarifies my position and we can put this to rest.
I stand by my comments based on my experience. Admittedly, I don't trade the RUT, but based on my experiences with SPX and NDX, most of the time the differences between the settlement price (which IS calculated from the opening prints for each stock-perhaps my terminology was a bit off, but my understanding is NOT) and the quotes you see on your broker's screen at the market's open ARE relatively small. With the RUT, the differences may be somewhat larger occasionally due to the fact that many small company shares trade with less frequency and volume.
Second, IF you read my comments carefully, you will note that there was a warning based on my own experience. I know EXACTLY what can happen!! I also gave some very specific advice in there to close the position without access to protection from the futures. Read my comments again, and you will see that this is so.
Third, you CAN more or less protect yourself with futures contract overnight, although it will probably require a long night looking at the screen, and perhaps some trading losses and commissions costs if whipsaws occured. I do understand how to do this effectively, but generally it would not be worth it to lose a night's sleep unless the dollar amounts were quite large. In the scenario that would generate large losses to the OP, however, the protection would be very effective. If the RUT futures were to rise past 530 overnight ( on a fair value basis) in a relatively steady fashion, the protection afforded by the futures would be close to complete. In rare cases, it could actually be profitable on a net basis. Admittedly, this isn't the perfect solution, but it would be MUCH superior to watching helplessly!! Don't you agree?
Finally, I admit that I rarely hold positions into the settlement process, and would NOT hold this RUT position overnight with it being so close (as I advised). Usually, I close my positions before expiry week for 0.15 or so if they are credit spreads, or roll them out. Debit spreads that are OTM can be held into expiry if they are protecting credit spreads for the next month without major concern since they can help you if the market gaps into the position overnight.
I trust this clarifies my position and we can put this to rest.
I actually went to the trouble of calculating the difference between the open for the RUT and the RLS (the settlement price) for the last six months just to be completely fair with Mark and MTE, who I both respect.
Here is what I found:
Expiry Date __ Open ___ RLS ____ Difference
19/06/2009 __ 513.45 __517.24 __ 3.79
15/05/2009 __ 480.96 __481.06 __ 0.1
17/04/2009 __ 474.37 __475.52 __ 1.15
20/03/2009 __ 415.05 __416.78 __ 1.73
20/02/2009 __ 412.99 __409.86 __ 3.13
16/01/2009 __ 462.81 __466.59 __ 3.78
The largest difference in the last six months was 3.79, which suggests that it is not trivial, but not massive either, so we may both be off a bit, and our advice is the same in either event. Hopefully, the OP simply has sold his option spread for a tidy profit.
If anyone would like to look into this further, and go back a few years, I'd be interested in their research. My suspicion is that the difference has probably narrowed over the last few years.
Here is what I found:
Expiry Date __ Open ___ RLS ____ Difference
19/06/2009 __ 513.45 __517.24 __ 3.79
15/05/2009 __ 480.96 __481.06 __ 0.1
17/04/2009 __ 474.37 __475.52 __ 1.15
20/03/2009 __ 415.05 __416.78 __ 1.73
20/02/2009 __ 412.99 __409.86 __ 3.13
16/01/2009 __ 462.81 __466.59 __ 3.78
The largest difference in the last six months was 3.79, which suggests that it is not trivial, but not massive either, so we may both be off a bit, and our advice is the same in either event. Hopefully, the OP simply has sold his option spread for a tidy profit.
If anyone would like to look into this further, and go back a few years, I'd be interested in their research. My suspicion is that the difference has probably narrowed over the last few years.
Best regards,Quote from JohnGreen:
Mark-- I'm pretty disappointed in your reply, frankly. This is NOT a case of calling a put a call or a radical error in judgment and does not deserve the kind of reaction you responded with. I'm definitely NOT a rookie trader, and you should know that already since I have participated in numerous discussions with you here on elitetrader, and have generally agreed with most of your positions as being wise and sensible.
Yes John. I know you are not a beginner.
I stand by my comments based on my experience. Admittedly, I don't trade the RUT, but based on my experiences with SPX and NDX, most of the time the differences between the settlement price (which IS calculated from the opening prints for each stock-perhaps my terminology was a bit off, but my understanding is NOT) and the quotes you see on your broker's screen at the market's open ARE relatively small. With the RUT, the differences may be somewhat larger occasionally due to the fact that many small company shares trade with less frequency and volume.
I must tell you that if you stand on this belief then you and I are going to have to agree to disagree. True, when the opening is dull and is relatively unchanged, there is a good chance that the settlement price of any of the cash-settled indexes (SPX, RUT, NDX) <i>will</i> be near the market's opening price.
But when there is any decent sized move, settlement prices cause a lot of joy and pain due to how far they are from the opening print for the index. Many times (I lack the data to tell you how often this happens) the settlement price is significantly above the official high, or below the official low, for the day.
That leaves beginners bewildered, angry, and they feel cheated. That's their own fault for not understanding how the settlement is calculated. But the bottom line remains that this happens often enough to be a major concern and I don't believe it's right to suggest that one can expect the settlement and initial prints to be similar.
The reason why this disparity occurs can be discussed, but it's really not germane.
Second, IF you read my comments carefully, you will note that there was a warning based on my own experience. I know EXACTLY what can happen!! I also gave some very specific advice in there to close the position without access to protection from the futures. Read my comments again, and you will see that this is so.
Yes you properly (ok, that's an opinion, but we share the same opinion) suggested closing. But running to futures does not afford good protection <i>for the risk involved</i>. Sometimes the market reverses. If the trader buys calls for protection, the loss resulting from the reversal is not large. But it is possible that futures will decline by enough to offset all profits from the original trade. Based on my personal experience I feel it is a bad idea to adjust an option position (with negative gamma) with a high priced underlying asset.
Third, you CAN more or less protect yourself with futures contract overnight, although it will probably require a long night looking at the screen, and perhaps some trading losses and commissions costs if whipsaws occured.
I do understand how to do this effectively, but generally it would not be worth it to lose a night's sleep unless the dollar amounts were quite large.
I'm sure you do. but you were suggesting that a newcomer do this. Who would be available to show him how to do it effectively?
In the scenario that would generate large losses to the OP, however, the protection would be very effective.
Losses are limited because it was a spread. And I'm NOT saying you cannot use futures (although to me it's a NEVER), but why use them when the options are trading and calls are available? That's my point. Cheap calls are more efficient for protection than expensive futures contracts (or shares of stock). If it's after hours, that is an entirely separate discussion.
If the RUT futures were to rise past 530 overnight ( on a fair value basis) in a relatively steady fashion, the protection afforded by the futures would be close to complete. In rare cases, it could actually be profitable on a net basis. Admittedly, this isn't the perfect solution, but it would be MUCH superior to watching helplessly!! Don't you agree?
Yes. I agree. But I would prefer to buy calls instead. That affords the same protection with an overnight rally. And if the futures move high enough to generate a profit - possible when you own extra naked longs vs. a spsread - then the call buyer could short futures to lock in the profits. That's using futures when it's impossible to suffer a whipsaw.
Finally, I admit that I rarely hold positions into the settlement process, and would NOT hold this RUT position overnight with it being so close (as I advised).
Agree 100%. It's folly. It's risky. Regardless of where the market opens tomorrow and regardless of how successful this spread turns out to be, in our opinion, holding overnight tonight was the wroing thing to do. Holding into settlement is a pure gamble, and that's not investing.
Usually, I close my positions before expiry week for 0.15 or so if they are credit spreads, or roll them out. Debit spreads that are OTM can be held into expiry if they are protecting credit spreads for the next month without major concern since they can help you if the market gaps into the position overnight.
Me too. Hate settlement risk.
I trust this clarifies my position and we can put this to rest.
It does and I hope I have clarified mine. Putting it to rest works for me.
Mark