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Allowing Options to Expire
- Thread starter i005890
- Start date
Quote from JohnGreen:
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.
I have the data going all the way back to November 1993. However, I'm comparing Thu close to Fri settlement value, and I haven't updated the data after Dec 2008 expiration.
Here are the stats for the difference between Thu close and Fri settlement value calculated using the absolute values(118 observations starting Nov 1993 and ending Dec 2008):
Mean is 0,62%
St. deviation is 0,88%
The maximum was 6,60% or 47.73 points in Sep 2008 expiration.
Out of these 118 observations, 20 were more than 5 points, and 11 more than 10 points. The only two above 20 points were the Sep 2008 with 47.73 points and Aug 2007 with 33.89 points.
MTE,
thanks for your work on this. Is it possible for you to compare the Friday open with the settlement value? I know that Yahoo has the data for the opens. This would give a clearer picture of the effectiveness of using a futures strategy on the RUT.
The more that I think about this, the more I like the idea of buying a call for rock solid protection. Futures introduce other elements of risk that make them much trickier as a hedge.
I note as well that the RLS at the time of writing has still not yet been posted on the CBOE website. Since it is after 4:00 EST, I'd say that the settlement process for RUT is somewhere between tedious and ridiculous. Plenty of room for improvement there, I'd say.
The SPX settlement today was only 0.53 off of the opening value, and was released much earlier in the day. I happened to have a batch of options (puts way OTM--over 100 points as of the close yesterday) that were part of a large and complex spread. TOS released all the margin in my account relating to these options sometime around midmorning. I'm guessing with the RUT, today would be a frozen day on the margin front.
thanks for your work on this. Is it possible for you to compare the Friday open with the settlement value? I know that Yahoo has the data for the opens. This would give a clearer picture of the effectiveness of using a futures strategy on the RUT.
The more that I think about this, the more I like the idea of buying a call for rock solid protection. Futures introduce other elements of risk that make them much trickier as a hedge.
I note as well that the RLS at the time of writing has still not yet been posted on the CBOE website. Since it is after 4:00 EST, I'd say that the settlement process for RUT is somewhere between tedious and ridiculous. Plenty of room for improvement there, I'd say.
The SPX settlement today was only 0.53 off of the opening value, and was released much earlier in the day. I happened to have a batch of options (puts way OTM--over 100 points as of the close yesterday) that were part of a large and complex spread. TOS released all the margin in my account relating to these options sometime around midmorning. I'm guessing with the RUT, today would be a frozen day on the margin front.
Quote from JohnGreen:
MTE,
thanks for your work on this. Is it possible for you to compare the Friday open with the settlement value? I know that Yahoo has the data for the opens. This would give a clearer picture of the effectiveness of using a futures strategy on the RUT.
The more that I think about this, the more I like the idea of buying a call for rock solid protection. Futures introduce other elements of risk that make them much trickier as a hedge.
I note as well that the RLS at the time of writing has still not yet been posted on the CBOE website. Since it is after 4:00 EST, I'd say that the settlement process for RUT is somewhere between tedious and ridiculous. Plenty of room for improvement there, I'd say.
The SPX settlement today was only 0.53 off of the opening value, and was released much earlier in the day. I happened to have a batch of options (puts way OTM--over 100 points as of the close yesterday) that were part of a large and complex spread. TOS released all the margin in my account relating to these options sometime around midmorning. I'm guessing with the RUT, today would be a frozen day on the margin front.
Ok, here are the stats for the Fri open vs. Fri settle for RUT for the same period as before:
Average difference in absolute terms 0.49%
St deviation 0.54%
Max 3.72% or 27.67 points recorded in Sep 2008 expiration. The 2nd highest was Aug 2007 exp with 18.45 points.
MTE, thanks once again for your investigative work. I think it is extremely useful to have solid empirical data informing opinion.
Let\s look closely and see what it means. Here's my take...
As MTE pointed out, most months the difference between open and RLS is not large, so you would have good protection from the futures. Score +1 for the futures..
I then took a closer look on Yahoo to see how the prices behaved overnight in the two instances you mentioned.
I remember September 2008 expiration painfully, not because of the RUT, but because of the NDX which moved up dramatically overnight and cost me money. I decided that was the last time I would allow that to happen without either buying things in or having the futures account ready and armed to protect me.
In the September 2008 case, the difference between the close on the day before and the open was about 20 points for RUT, meaning that about 20 points of profit could have been garnered from the futures which would have helped. September 2008 also was a time of intense volatility as we remember well, and during such times options trading becomes much trickier as well, with the bid-ask expanding, meaning that it would be difficult to sell the spread at a good price. If you had had a 10 point spread right at the money at the close the night before, you would have been just fine using the futures because the futures would have covered you completely and then some despite the pathetic RLS outcome. Score +1 for the futures.
August 2007 is a totally different case. The difference between the close the night before and the open in the morning was less than 2 points, meaning that the futures would have not been useful, and ATM spread holders were completely at the mercy of the market. Score a dramatic -1 for the futures.
The August 2007 case is deeply troubling for a person relying on protection from the futures. An ATM spread holder would have had his legs chopped off in about 50% of the cases. Even if this happens in only one month out of 50, it's a risk I would not take unless it represented only a very small fraction of my portfolio!
So... in my opinion, the most prudent course of action in is to close out any RUT spreads before expiry, or buy a protective put or call, depending on the type of spread you have if they are close to the money, and that likely means taking action anywhere within about 30-35 points or so, so that you give yourself room for a large overnight movement and an adverse RLS.
I also think that there is very good reason for options traders to petition for serious changes to the settlement process so that these risks can be mitigated. Just using the opening value calculated in the usual way would make the futures a 95% viable strategy for protection rather than about 70% as it is stands today. That fact alone would mean tighter bid-ask spreads near the close on Thursday as the uncertainty would be minimized. It also would mean that everyone holding these spreads would know exactly how they stood just after 9:30 AM EST on Friday morning.
Let\s look closely and see what it means. Here's my take...
As MTE pointed out, most months the difference between open and RLS is not large, so you would have good protection from the futures. Score +1 for the futures..
I then took a closer look on Yahoo to see how the prices behaved overnight in the two instances you mentioned.
I remember September 2008 expiration painfully, not because of the RUT, but because of the NDX which moved up dramatically overnight and cost me money. I decided that was the last time I would allow that to happen without either buying things in or having the futures account ready and armed to protect me.
In the September 2008 case, the difference between the close on the day before and the open was about 20 points for RUT, meaning that about 20 points of profit could have been garnered from the futures which would have helped. September 2008 also was a time of intense volatility as we remember well, and during such times options trading becomes much trickier as well, with the bid-ask expanding, meaning that it would be difficult to sell the spread at a good price. If you had had a 10 point spread right at the money at the close the night before, you would have been just fine using the futures because the futures would have covered you completely and then some despite the pathetic RLS outcome. Score +1 for the futures.
August 2007 is a totally different case. The difference between the close the night before and the open in the morning was less than 2 points, meaning that the futures would have not been useful, and ATM spread holders were completely at the mercy of the market. Score a dramatic -1 for the futures.
The August 2007 case is deeply troubling for a person relying on protection from the futures. An ATM spread holder would have had his legs chopped off in about 50% of the cases. Even if this happens in only one month out of 50, it's a risk I would not take unless it represented only a very small fraction of my portfolio!
So... in my opinion, the most prudent course of action in is to close out any RUT spreads before expiry, or buy a protective put or call, depending on the type of spread you have if they are close to the money, and that likely means taking action anywhere within about 30-35 points or so, so that you give yourself room for a large overnight movement and an adverse RLS.
I also think that there is very good reason for options traders to petition for serious changes to the settlement process so that these risks can be mitigated. Just using the opening value calculated in the usual way would make the futures a 95% viable strategy for protection rather than about 70% as it is stands today. That fact alone would mean tighter bid-ask spreads near the close on Thursday as the uncertainty would be minimized. It also would mean that everyone holding these spreads would know exactly how they stood just after 9:30 AM EST on Friday morning.
Quote from JohnGreen:
I also think that there is very good reason for options traders to petition for serious changes to the settlement process so that these risks can be mitigated. Just using the opening value calculated in the usual way ...
What specifically are you advocating here? What do you see as 'the usual way?' Certainly changes to the calculation will step on someone's toes, so clarity in what the change should be helps make a more compelling case.
rluser,
In response to your question, I did some investigation on the internet in order to determine just how the RUT is "ordinarily" calculated. Unfortunately, my search wasn't as useful as I would have liked.
There is plenty of information put out by Russel Investments (the company that administers the index) as to its composition, some on various weighting factors, but nothing on the important details that I was looking for--specifically how often it is calculated and what they do with the prices of companies that have not traded between the calculation timeframes.
I do know that the information is available on a minute by minute basis (and perhaps 15 seconds?) because you can simply watch the RUT on your broker's software screen and see that it updates fairly often. I also know that the IWM (RUT X 1/10 ETF) trades on a fairly regular basis and with decent volume.
My assumption is that Russel simply uses the last price traded for each of the component stocks even if that last price for some of the stocks is several hours old. Otherwise, they could not update the figures as rapidly as they do.
Since all RUT option trading takes place using this information, I think that the settlement should also use the same methodology.
Hopefully, this helps, and makes my meaning clear. If someone knows the exact process by which the figures are obtained, please clarify and I will happily stand corrected.
In response to your question, I did some investigation on the internet in order to determine just how the RUT is "ordinarily" calculated. Unfortunately, my search wasn't as useful as I would have liked.
There is plenty of information put out by Russel Investments (the company that administers the index) as to its composition, some on various weighting factors, but nothing on the important details that I was looking for--specifically how often it is calculated and what they do with the prices of companies that have not traded between the calculation timeframes.
I do know that the information is available on a minute by minute basis (and perhaps 15 seconds?) because you can simply watch the RUT on your broker's software screen and see that it updates fairly often. I also know that the IWM (RUT X 1/10 ETF) trades on a fairly regular basis and with decent volume.
My assumption is that Russel simply uses the last price traded for each of the component stocks even if that last price for some of the stocks is several hours old. Otherwise, they could not update the figures as rapidly as they do.
Since all RUT option trading takes place using this information, I think that the settlement should also use the same methodology.
Hopefully, this helps, and makes my meaning clear. If someone knows the exact process by which the figures are obtained, please clarify and I will happily stand corrected.
Quote from JohnGreen:
So... in my opinion, the most prudent course of action in is to close out any RUT spreads before expiry, or buy a protective put or call, depending on the type of spread you have
Agree, almost 100%. Taking settlement risk is just not worthwhile.
But if you are short a 10-point spread that would cost $9.80 to cover, don't bother. Stay short, being willing to lose that last 20 cents - and every once in awhile, you get pleasant surprise.
I also think that there is very good reason for options traders to petition for serious changes to the settlement process so that these risks can be mitigated.
Yes, there are great reasons. But it will not happen. I agree it's unfair, but everyone knows (or should) the ground rules - and failure to understand them is the individual's fault.
This setup was not chosen at random. The founding fathers knew what they were doing and there is no chance this will ever be changed. Besides it provides another opportunity for some to manipulate the market, and those who can do that will never give up that chance.
Just using the opening value calculated in the usual way would make the futures a 95% viable strategy for protection rather than about 70% as it is stands today. That fact alone would mean tighter bid-ask spreads near the close on Thursday as the uncertainty would be minimized. It also would mean that everyone holding these spreads would know exactly how they stood just after 9:30 AM EST on Friday morning.
I do believe that it takes far to long to determine the settlement price. I cannot understand why that is true. Of course, not every stock opens near the opening bell and it's mandatory to wait for all 500 stocks to trade.
Unless the opening price for each stock is just too difficult to determine. They use an 'opening range.' I don't know how that is defined, nor do I know who is responsible for making the final calculation, but a huge amount of cash changes hands based on the integrity and reliability of whoever it is that makes the calculation. I would hope it's the OCC, but I don't see how they can be involved.
Mark
Two quick comments...
quote from Mark:
"This setup was not chosen at random. The founding fathers knew what they were doing and there is no chance this will ever be changed. Besides it provides another opportunity for some to manipulate the market, and those who can do that will never give up that chance."
I sadly suspect that you are far more right about that than anyone will admit publicly..
The comment about holding the short spread that is 9.80 against you made me chuckle, but of course it's absolutely true! It comes down to risk vs. reward. The 0.20 is a lottery ticket that has a decent chance of payoff.
quote from Mark:
"This setup was not chosen at random. The founding fathers knew what they were doing and there is no chance this will ever be changed. Besides it provides another opportunity for some to manipulate the market, and those who can do that will never give up that chance."
I sadly suspect that you are far more right about that than anyone will admit publicly..
The comment about holding the short spread that is 9.80 against you made me chuckle, but of course it's absolutely true! It comes down to risk vs. reward. The 0.20 is a lottery ticket that has a decent chance of payoff.