SPX weekly options

[TD877]

I'm interested in getting my feet wet with either SPX or SPY options, and have found a large amount of great information online, but can't find some basic practical stuff anywhere. Hoping you all could help me out some:

1) Based on http://www.cboe.com/micro/weeklys/spxweeklys.aspx, the SPX M, W, F options expire at the close and are settled with cash. Does this automatically happen if I am holding an in-the-money contract, or do I need to explicitly signal to my broker somehow?

2) SPY options seem more complicated. If I have an in-the-money call option, will they automatically use money in my account to purchase the SPY ETF?

3) Etrade lists all the expiration dates for SPX and SPY as one day after the contract date (e.g. the 11/7/2016 contract is listed as expiring on 11/8/16). What am I missing?

Thanks!

 

[Robert Morse]

To be honest, from just your post, I think you are going about this backwards. In general, you should go through your learning process to understated how these options work and the risk involved. Then look for a strategy that fits your risk level, that you feel gives you an edge over the market, then "get your feet wet",and then test it with very small size"

 

[Sig]

I'm interested in getting my feet wet with either SPX or SPY options, and have found a large amount of great information online, but can't find some basic practical stuff anywhere. Hoping you all could help me out some:

1) Based on http://www.cboe.com/micro/weeklys/spxweeklys.aspx, the SPX M, W, F options expire at the close and are settled with cash. Does this automatically happen if I am holding an in-the-money contract, or do I need to explicitly signal to my broker somehow?

2) SPY options seem more complicated. If I have an in-the-money call option, will they automatically use money in my account to purchase the SPY ETF?

3) Etrade lists all the expiration dates for SPX and SPY as one day after the contract date (e.g. the 11/7/2016 contract is listed as expiring on 11/8/16). What am I missing?

Thanks!

SPX weekly options automatically settle to cash based on the M, W, and F closing prices. You don't need to take action. The closing date isn't really relevant, they behave as you'd expect, i.e. the Monday option expires at the close on Monday.
SPY options behave like any other stock options. You would need to ask your broker about their specific exercise requirements. Keep in mind that someone like Interactive Brokers will test your account up to 2 days before expiration to see if you have enough cash to buy the underlying when exercised and auto sell your options positions at horrible market order prices if you don't.
One final note, ensure your actually trading the weekly or PM SPX options. The monthly options are AM settled which is a very counterintuitive process you want no part of until you fully understand it. The way most brokers list SPX options it's easy to confuse the two. Even after you've been trading the weekly options for a while the monthly can sneak in on you.

 

[i960]

If you're interested in getting your feet wet you should stick to SPY right now due to the relative size compared to SPX and ES.

If you're profitable or actually have an edge somehow then IMO skip SPX and simply trade ES options as they're easier to hedge and trade nearly 23 hours/day throughout the week. This is a significant advantage as markets continue to trade more globally (US->Asia->Europe cycle) and ES futures and options use the same SPAN margining. SPX and SPY options use portfolio margin or reg-T.

Also if you're in the US remember that both SPX and ES options are taxed as 1256 contracts, SPY is taxed STCG/LTCG equity style. You want 1256 taxation.

 

[Sig]

If you're interested in getting your feet wet you should stick to SPY right now due to the relative size compared to SPX and ES.

If you're profitable or actually have an edge somehow then IMO skip SPX and simply trade ES options as they're easier to hedge and trade nearly 23 hours/day throughout the week. This is a significant advantage as markets continue to trade more globally (US->Asia->Europe cycle) and ES futures and options use the same SPAN margining. SPX and SPY options use portfolio margin or reg-T.

Also if you're in the US remember that both SPX and ES options are taxed as 1256 contracts, SPY is taxed STCG/LTCG equity style. You want 1256 taxation.

Those are all good points, especially 1256 taxation. I would point out that if you plan on holding the options to expiration (or in the case of IB within 2 days of expiration), as it sounds like you might, the ES options deliver into the futures so you'll need the cash on hand to purchase the whole ES future if you take delivery, plus the pain of selling it. The SPX only requires the money you paid to enter the position.

Also, one more annoying Interactive Brokers stupidity impacts FOPs but not SPX or SPY options, if you buy a debit spread, i.e. your max risk can't exceed what you already paid, they still may charge you a margin in addition to the debit. They're too stupid to understand how a debit spread works, so they determine the margin for each leg separately and add them together, which because of minimum margins sometimes mean you have to maintain a margin on a position that it's mathematically impossible to lose any more money on than you spent to enter. If you can't tell by this point, it's inadvisable to trade options with IB unless you relish frustration and working with complete idiots.

 

[i960]

ES options deliver into the futures so you'll need the cash on hand to purchase the whole ES future if you take delivery, plus the pain of selling it. The SPX only requires the money you paid to enter the position.

Easily solvable by just offsetting the futures position before expiration - it'll all net out to 0. Common trick with any option if they go DITM enough that the spread costs more to cross.

Also, one more annoying Interactive Brokers stupidity impacts FOPs but not SPX or SPY options, if you buy a debit spread, i.e. your max risk can't exceed what you already paid, they still may charge you a margin in addition to the debit. They're too stupid to understand how a debit spread works, so they determine the margin for each leg separately and add them together, which because of minimum margins sometimes mean you have to maintain a margin on a position that it's mathematically impossible to lose any more money on than you spent to enter

Yep, literally everyone hates this about IB. IMO this is a massive hack solution for solving the pin risk problem. It's not that they're too stupid, it's that they want to make their margining system basically fool-proof against hidden losses, hence they pass on the inconvenience to everyone else by treating it as if 1 leg might potentially go unassigned/auto-exercised 100% of the time.

 

[Sig]

Easily solvable by just offsetting the futures position before expiration - it'll all net out to 0. Common trick with any option if they go DITM enough that the spread costs more to cross.

Do you mean selling short the future if you're long the option or vice versa? Doesn't that still require you have a substantial extra amount of cash on hand to purchase the future, or is margin smart enough to realize that you have the option and net your margin to $0? Obviously this wouldn't work with IB because they'd have auto-liquidated you long before unless you did this 2 days before expiration, but fortunately I'm not using them anymore.

My issue is that I'm trading ES spreads that I want to keep in play all the way until expiration. If I bought the future I'd obviously be locking in whatever price was there when I bought the future. I can wait until right before close, but if I'm close to the edge I do get some pin risk.

 

[i960]

Do you mean selling short the future if you're long the option or vice versa? Doesn't that still require you have a substantial extra amount of cash on hand to purchase the future, or is margin smart enough to realize that you have the option and net your margin to $0? Obviously this wouldn't work with IB because they'd have auto-liquidated you long before unless you did this 2 days before expiration, but fortunately I'm not using them anymore.

My issue is that I'm trading ES spreads that I want to keep in play all the way until expiration. If I bought the future I'd obviously be locking in whatever price was there when I bought the future. I can wait until right before close, but if I'm close to the edge I do get some pin risk.

Yes, if you're going to be exercised or assigned into a position, you either close out the option entirely, or alternatively open the opposite position before hand so that it'll be closed out instead. SPAN is smart enough to handle this case - although I'm not certain if it's smart enough to cut the margin all the way down and consider it 0. It's basically a locked in synthetic put.

The main problem here will of course be IB again.

 

[Sig]

Yes, if you're going to be exercised or assigned into a position, you either close out the option entirely, or alternatively open the opposite position before hand so that it'll be closed out instead. SPAN is smart enough to handle this case - although I'm not certain if it's smart enough to cut the margin all the way down and consider it 0. It's basically a locked in synthetic put.

The main problem here will of course be IB again.

Thanks, I hadn't tested that with SPAN and didn't realize it worked, although now that you describe it the concept makes perfect sense. I'm with OptionsXpress now so I'll be giving it a try with a small position this week to see if there are any idiosyncratic gotchas with their system. As long as I accept the pin risk it seems like it should work.

 

[CBC]

3) Etrade lists all the expiration dates

M8, I would stay away from etrade. They are very expensive .