cash settlement options are ITM, what next?

M

Martinisko125

Hello,

as you know, the worst scenario for cash settlement options is that they will become ITM. And what can I do in this situations?

What can (which possibilities) I do when market at some time open in very very strong gap (for example as in August this year - gap on SPX was maybe 5 % - 6%) and my cash settlement options will become ITM or deep ITM ? What would I do? Close the position and take high loss? But what if the market starts to grow again?

I would like to trade options on SPX however and I need to think about all possible scenarios and this is the worst.

Thank you
 
Do you what you want to do until expiration. At expiration they settle for the index value. It is only an issue if it was a hedge. Your hedge is gone at settlement.
 
Cash settled options offer a lot less risk when they go in the money. You don't have to worry about getting put stock, everything settles for cash.

Your only risk, as rmorse points out, is if you have a different hedge at expiration then the expiring options.
 
Thank you man for your responses but you probably haven't understand me. For example:

I open credit vertical put spread:

-1970 p
+1960 p

for 1,0$ (100 USD).

SPX is at 2035. And now imagine that tomorrow SPX open at 1950 and it will go down and my options are ITM. My maximal loss is 1000 USD and it is probably that my options expire ITM ! I suffer loss 1000 USD for 100 USD, this is a huge disproportion (...I know that this RRR is for spreads typical)

So my question is what can I do in this situation? (except close the position)

Have I any possibility reduce the potential max. loss (for example open any additional position) ? Have you any ideas? Thank you

 
Martinisko125 said:
Thank you man for your responses but you probably haven't understand me. For example:

I open credit vertical put spread:

-1970 p
+1960 p

for 1,0$ (100 USD).

SPX is at 2035. And now imagine that tomorrow SPX open at 1950 and it will go down and my options are ITM. My maximal loss is 1000 USD and it is probably that my options expire ITM ! I suffer loss 1000 USD for 100 USD, this is a huge disproportion (...I know that this RRR is for spreads typical)

So my question is what can I do in this situation? (except close the position)

Have I any possibility reduce the potential max. loss (for example open any additional position) ? Have you any ideas? Thank you
More...

In your scenario it gets more fun! Because if the SPX fell to 1950, it could easily rally back to 1990 tomorrow. Vols will be very bid meaning that the spread you are short won't be worth $10, it might be worth $7. So you are sitting on a $6 loss and it's very possible that becomes a $10 loss or the markets rebound and you end up making $1 overall. What do you do now?

Short vol is very stressful when there is stress in the markets.
 
"Because if the SPX fell to 1950, it could easily rally back to 1990 tomorrow."

This is not certain!! I need something what cut down my open loss or cut down my potential maximal loss.

"Vols will be very bid meaning that the spread you are short won't be worth $10, it might be worth $7. So you are sitting on a $6 loss and it's very possible that becomes a $10 loss or the markets rebound and you end up making $1 overall"

you are right however in that situation I can´t know what will happen. If market will go down my options will ITM until expiration

My quentions sounds: what can I do when my cash settlement options became ITM (except close the position) and they remain ITM until expiration.
 
The nasty side of options - When to close the position?

Damned if you do, damned if you don't - in other words you always run the risk of missed gains or locking in losses prematurely whenever you close out a position.




:)
 
Martinisko125 said:
"Because if the SPX fell to 1950, it could easily rally back to 1990 tomorrow."

This is not certain!! I need something what cut down my open loss or cut down my potential maximal loss.

"Vols will be very bid meaning that the spread you are short won't be worth $10, it might be worth $7. So you are sitting on a $6 loss and it's very possible that becomes a $10 loss or the markets rebound and you end up making $1 overall"

you are right however in that situation I can´t know what will happen. If market will go down my options will ITM until expiration

My quentions sounds: what can I do when my cash settlement options became ITM (except close the position) and they remain ITM until expiration.
More...

you cannot do anything.
 
In your case you could trade it into a 5 point spread instead of your current 10, or take the loss on half and bet the other half will go up. No free money in options or anywhere else, you got the risk adjusted premium for that spread when you sold it.
 
"In your case you could trade it into a 5 point spread instead of your current 10"

In that case put options will be very very very expensive. It is not a good idea to buy a new put

"take the loss on half and bet the other half will go up."

can you please writte me what do you exactly mean?

I think that one possibility in this situation is write a new call ATM credit spread or buy new ATM/ITM put but with shorter expiration (this is also enough expensive solution)
 
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