Futures Options Settlement Explained | Closing the Gap: Futures Edition

[Music] alright options on futures and options on equities have a couple of differences and this is this is one of those things you just have to get comfortable in the futures space options on equities and ETFs are so elegant in terms of they all expire at the same time roughly in the same expiration cycle and they trade in dollars and cents so it's all very easy now some of the expiration specifications quotations are different margin requirements are different so we're gonna look just an S apiece because we've we've got in every quarter we've got for lack of a better phrase the big three roof rolls treasury futures which we rolled our bonds to from June to sell they go first in 14 days we're gonna roll our SP futures from June to sep 24 incurrence e futures from jr. sup those are the big quarterly products now depending on the expiration cycles some futures options expire to cash those are the ones we're going to be focusing on today all equity index products SPS Nasdaq Russell now there are not options on futures but those three will have options on futures that we can trade depending on the date in the index futures options the options expire the same day as the future settlement now sometimes on the same day on the quarterly when we have quarterly explorations we have again in 21 days we've got an expiration three Fridays from now for S&P futures the june futures the SP options on futures for that expiration will expire concurrently at 8:30 in the morning and commodity futures a little bit different and unfortunately it depends on the commodity natural gas options are cash settled so they expire on the same day as the futures but crude oil crude oil options are into a physically settled crude oil contract the options expire five days before the futures in FX it's 10 days now guys yes this is a it's a little bit different but the good news is coming in the next couple of weeks then splash in the futures we're going to be putting together some great cheat sheets so you'll know exactly what expires into what one of the reasons you want to know that too is when you have options that expire into an underlying if you're trading that underlying anding the options whether it be a covered call covered put what you can add them at no additional buying power reduction so there's a tremendous capital efficiency to understanding that so time if we jump ahead if we take a look at emini S&P zop shion's there are actually four different kinds of options two of them are American styled which means that could be exercised at any time to our European which means a exercised only upon expiration now the ones we're gonna focus about the most on are the American styled quarterly in serial options quarterly SAR what we talked about they expire concurrently with the futures every June I'm sorry March June 7ds third Friday of the month at 8:30 in the morning now the serial options which would be if I'm trading at July or in August that is not a quarterly that's a serial monthly expiration they expire at 3:15 in the afternoon I'm at third Friday so there's a you you need to know when these expire and a month options at three o'clock along with the weekly at three o'clock so there's a little bit of difference in terms of time when these expire and what they expire to so just so we know what the someone press is we can jump ahead one slide take a quick look at this is just a very nice visual if we take a look at the June yellow box enter the june futures they settled the cash the June options actually settled the cash what I mean by that is a June option expires 21 days of Friday at 8:30 it becomes a future for a split second which extends to cash so they all collapse onto each other very nicely most options on futures that are physically settled no firm tasty works does not let you depending on the product take that - that futures product - expiration the options you could certainly do that now bond options expire 21 days before the futures you think why so much it has to do with the bond delivery process it's just that they do spire 21 days and what happens when you get a future that it is in cash-settled you get exorcised into just one of the underlying futures contracts so let's just go out we know in 14 days our SEP futures will be our active future so what do I want to trade against that well probably the July options will get you to that 45 days sweet spot so if I'm trading a July option and that is a serial option it expires at 3:15 in the afternoon on the third Friday of the month what does it expire in or exercise in time should say expire but exercise or you're assigned into your assigned into a September future it's a July option that goes into the activist did you put this page together did you do this or is this some where did you take this from somewhere no we did this you did this this is really good thank you very much I like it cuz that's always been like confusing let me let me let me treat you as one of his children but you'd probably change the colors a little bit [Music] why do you Chum the water for me like that yeah no no this is actually really good because this confuses we should give this to our support teams over a tasty works when we launch options on futures because this is the question that I get more than anything else certainly comes two futures options it's just this one picture right here well done this to Scott in the equities world what's great is you whatever option you're in it's against that hundred shares for lack of a praise of that spot underlying here you have a future you go into so yes surely my fault which future and why well right now if you were trading a June future and you sold a July option against it you would loss a year long of June future and you're sold but you like all you in your mind you'd have a covered call actually the exchange does not recognize that because your July option exercises or as a signed into a September future so you'll get margined on both sides of that now end of the month options is that something we focus on because they don't have a lot of liquidity once it allow this zom will show up on our 45 date sweet spot but what you're gonna find is we use 45 days is a great metric if liquidity is there the end of month options are usually are they quoted absolutely but they can be through three four five ticks line that's a lot of slippage so I would rather move to fifty two days thirty five days rather than sticking in those the weekly options our interesting pieces lots of liquidity especially around we're starting with weeklies that expire on Friday they also have weekly set expire on Wednesday Monday they're not doing a lot they're very weel yeah nobody trade so they're very event-driven if you have a Fed meeting on my tables don't you I don't careful you can offer those no I I don't think there's any reason to have those now weekly options are will be they all have a bottom if they're in the money you're automatically exercised so there is nothing you have to do you can't abandon those or give them contrary instructions you're automatically exercised in them so let's talk about the quarterly settlements we're coming up to in 21 days now what futures price since the futures expire at the exact same time as the options how do they come up with a an expiration price what is my value and for SPS and Nasdaq we use what's called the special opening quotation and it's the first print of every one of the 500 stocks in the SP or the 100 and Nasdaq and wherever that first one share prints they take all those add them together and average them on a capitalization weight a basis and you get what's called the set price that is what your future expires to and what you will be debited or credited against and that is what that option also determines whether or not it is in or out of the money so being mindful of the methodology that they use to determine what is that final settlement price the serial options are a little bit different because we don't have an expiring future we're going to actually be assigned or exercised into a current future if we were in July would be into that September future July option goes into a September future so how do we figure out what that exercise yes it that's the most confusing thing for individual investors and for myself included just like sometimes it goes into futures and sometimes it goes into cash at the key here is just roll your options early right we have to adjust although you have to adjust for for the although you have to adjust for the changes in price the roll prices right but and the roll right and that was a much bigger issue a year ago when we had such a backwardation the market is very close to two a push right now so a little bit of contango back in there but so the thing here is that we need to be mindful of so for those cereal options there's a volume weighted average price at 3:15 at 3 o'clock excuse me and that's what those are priced off of so you will know whether or not you're in or out of the money basis that 3 o'clock settlement so it's important to be aware the differences as you said tom between options on futures contracts and options on equities including their expiration dates sizes and dollar amounts options settlement for futures contracts could be confusing so it's important to be aware of Settlement Procedures this is trying to you know we don't have the choice of so many different expirations equities are kind of unique in that so we are usually wrapped around monthly explorations and crude monthly yes expirations and everything else so it's very straightforward and guys we will be addressing all 22 products tasty works offers we were we will have information like this for you in the next couple of weeks as we start to push this out which is really exciting and you guys will be very comfortable about this process beautiful job sorry for rushing you at the end here but we cannot make the opening okay smells next thanks babies too quick nice thing break it was tasty love that's good stuff you should yeah I definitely get that over ask I think that's really helpful for the support teams

Channel: tastytrade

Views: 3,706

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Keywords: futures, settlement, futures options, investing, investing for beginners, finance, stocks, trading, options trading, options, option, personal finance, how to trade, options trading strategies, futures strategies, market, tastytrade, trade strategies, professional trading, futures contract, cme group

Id: YaedEOffPow

Length: 10min 46sec (646 seconds)

Published: Fri May 25 2018