I've heard that cash settled is an advantage.... but if something is cash settled, don't you lose the power of your margin? it seems that a cash settled spx contract would be very expensive. from a risk management perspective, that seems harsh. i.e. being required to buy spy (if assigned) would use less cash resources than being forced to cash settle spx without any margin power. am I missing something? I know that buy/selling options on spx have better lower initial margin rates, but it seems it cash settlement quashes that advantage. am i missing something?
spx - why is cash settled an advantage?
- Thread starter Abundance Magnet
- Start date
Less risk. The contract has a settlement value as opposed to receiving the underlying and being unable to trade, say, over the weekend. You're risking Monday's open. SPX options are not futures options... so you're going to take delivery of the SPX basket?
Some advantages I can think of:
1. No worries for early exercising
2. No worries for market risk with assigned security
3. Lot easier to calculate profit/loss
Ostensibly there is the possibility of a cash-settled American.
AFAIK, OEX options were always both American and cash-settled since the early 80's. It was the dominant index contract for a while, until SPX...
OMG!! That would be so much risk given how the market yoyo's like that nowadays.
Robert Morse
Sponsor
Advantages of SPX vs SPY
- 1256 contract
- 10X SPY
- Single market place for all orders
- Very liquid (Must know how to work orders to find liquidity)
- Cash settled
- In a PMA, can be hedged with SPY
- No early assignment
- Smaller contract, so better for smaller retail accounts
- Not cash settled-if for a hedge, you don't lose your hedge
- Very liquid with narrow spreads
- More retail order flow
- Pays dividend
Bob
I think you are missing something on the margin side. If you buy a call or put with SPX the price of the call or put is the only thing you have to provide. If it settles in the money, you get the cash difference between the strike and your price deposited in your account. That's it. If you had purchased SPY options you would have to have a huge amount of additional cash in your account to buy that long position (for a call) when it expired in the money. Or if you use Interactive Brokers you need that margin a full trading day before expire or they autoliquidate you. Plus you now have a long position you have to sell. Plus you have pin risk if you try to end flat by buying a short position to offset your presumed long position and a sharp move at close has you ending up OTM. All avoided with cash settlement.
That said, if you don't hold to expire none of that matters. And the AM settle SPX is very counterintuitive if you haven't spent time studying it, so stay away from that until you understand the whole opening quote method.