On February 19th, P.M.-settled SPX options (SPXPM) will move from C2 to CBOE. Futhermore, current SPX Weeklys will move from symbol SPX to symbol SPXPM. In short, this means that all P.M.-settled S&P 500 Index options will now trade on CBOE and under the symbol SPXPM (EDITORS NOTE: See Below). This move creates a plethora of advantages for traders who prefer P.M. settlement and who trade WeeklysSM options with some frequency.
On February 19th, SPXPM options will move from C2 to CBOE. [In an edit to the original blog, please note that CBOE Regulatory Circular RG13-012 provides that the trading symbol and underlying for existing CBOE SPX, SPXW and SPXQ options will remain unchanged and are not impacted by the re-location of SPXPM. http://bit.ly/SPXPM ]
The Difference Between A.M. and P.M.-settled Options
The main difference between A.M. and P.M.-settled options centers on how the settlement price is obtained. For A.M.-settled options, the settlement price is obtained by taking the opening print of all the stocks in the Index on Friday morning. As stocks do not all open at the same time, a common consequence of A.M.-settled options is that the settlement price does not equal the opening price of the Index. Furthermore, in some cases, the settlement price may fall outside the trading range of the Index.
By contrast, for P.M.-settled options, the settlement price is obtained by taking the closing print of all the stocks in the Index on Friday’s close. Since closing prints can come no later than the end of the trading day, and since equity options are also P.M.-settled, it can be argued that P.M. settlement represents a cleaner expiration process for some traders.
The Advantage of a One-Stop Shop
Having all of the SPX WeeklysSM under the same Exchange facilitates the rolling of options in a particular strategy from one week to the next. Under the current system, rolling SPX WeeklysSM from one week to the next presents a small problem when one of the weeks involved in the roll is the standard SPX option. This is not only because you would be rolling from a P.M.-settled option to an A.M.-settled one (or vice-versa), but more importantly because you would be trading out of a product that exists on one Exchange and into a product on a different Exchange. This creates confusion when you try to create and label “spread” trades.
By having all SPX WeeklysSM under the same Exchange, and by having a P.M.-settled standard SPX expiration, spread transactions across any and all SPX WeeklysSM expirations can be executed with the same ease as is done in equity option positions.
Some Final Thoughts
This is an exciting development for SPX WeeklysSM traders. The ability to now trade SPX option spreads across all expirations and with a uniform settlement process completely opens the door for the implementation of all types of strategies. Coupled with the tight markets that result from the wide-scale quoting access enjoyed by SPXPM market makers, the opportunities that result from the move to CBOE could be significant.
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