SPX Settlement | Options Trading Concepts

everyone welcome back to Mike and his white board my name is Mike this is my white board and today we're gonna be talking about one of the more popular underlyings that you'll see here on tastytrade and that is SP X so if you're brand new to trading SP X or you're just learning about SP X there are some things that are important to keep in mind it's not like a normal normal equity where all the standard rules apply in fact there's a lot of different things and a lot of non-standard things that apply to SP X so let's get right into it and we'll discuss some of these things so the first thing to understand with SP X is that there is a settlement date so unlike regular equity expirations where all of them will have the last trading day as Friday so on Fridays close at 3:00 p.m. that's it that's the last time to trade it there's actually a difference between what expiration we're looking at with SP X so it's got a non-standard X pre expiration and so with what's really important to keep in mind with that is that when we're looking at SP x expirations if we're looking at a weekly expiration with SP X it's going to be p.m. settled so all these expirations are going to be on Friday but determining whether it's p.m. or a.m. settled is going to determine the last day to trade it so if we're looking at a weekly expiration it's going to be p.m. settled and this is going to be much like a normal equity so something like Apple or Google those are gonna have these p.m. settled expirations so the last day to trade this would be on Friday however if we're looking at the regular expiration for the month for SP X so which is usually the third Friday of each month that would be the normal expiration when we're looking at that one it is actually an am settled expiration so what that means is the last day to trade it is actually Thursday at the close so that's super important to remember especially if you if you have positions in SPX the last day to trade it if you're dealing with the regular or third Friday of each month expiration last day to trade it is Thursday however if you're looking at a weekly the last date to trade that would be Friday so let's dig into that a little bit deeper on the next slide here so when we're looking at the regular expiration or the third week of each month and the last Friday there we're going to be looking at SCT so basically the settlement price is based on the set price and what's important to note is that the set price is based on the pricing of the opening print of all the sp500 components Friday morning so as you can see here we've got a ton of different contributions to the S&P 500 and the set price is based on the opening print of all of those S&P components Friday morning so just thinking about that we can kind of come to the conclusion that the previous day is closed or Thursday is going to be very different than the Friday print of all these components in the sp500 come Friday morning and that is the case so when we're looking at set and the difference between the set price and the closing price of SPX on the previous day which is Thursday there's usually a pretty big difference sometimes it's pretty aligned but there can be a massive difference and that's really important to know so let's go along to the next slide here and we'll talk a little bit further about this so why does this all matter so when we're talking about the set price the SPX closing price on Thursday is not going to be the P&L for your normal expiration so when we're dealing again with that normal monthly expiration and SPX whatever the closing price was on Thursday is not normally going to be the set price the next day it could be but it's normally not and one thing to keep in mind is that the set price can be drastically different so we actually did a research study on this and we found that over the past few years the largest differential was nineteen point five points and since we're dealing with SPX which is $100 intervals so one point is a hundred dollars that's nineteen $150 difference so if I'm dealing with naked options and SPX or even defined risk one thing that can happen is it can flip our position P&L on its head so let's say I've got a winner let's say I sold a put in SP X and let's say it expired or I thought it expired out of the money on Thursday but I didn't know that it actually expires and the PNL difference is based on the set price Friday morning so let's say I sold a 2,000 put in SP X and the closing price was 2005 on Thursday however when I went to go look at the set price the next morning let's say there was a 15-point difference to the downside so let's say s ET was actually 1990 that would turn my winning trade into $1000 loser less the credit I received from originally selling that put in SP X so this is super important to note and on the other side if we're looking at losing positions maybe they can turn into winners so one thing to keep in mind is let's say I've got a losing spread so let's say I sold a put spread or credit spread and it's completely in the money again when I'm selling a spread I want it to expire out of the money that's where it's going to give me that positive PNL but if it's totally in the money since my risk is defined maybe I would consider letting it run through to see what the set price is since I know that the set price is really what's going to determine my pl so it's super important to keep this in mind and one thing we can do to avoid this is just keep in mind what expiration we're dealing with and if we're not comfortable holding the position to see what the set price is and there's really no reason no way to know what that set price will be it's really important to consider closing the position before letting that set price come into play so if I'm in if I'm dealing in the regular expiration and I know that it's going to expire or the last day to trade it is Thursday and on Friday morning the set price is going to determine my P&L maybe I'll close it just before the close on Thursday as opposed to letting it roll through on Friday so a lot of information here but we can roll it all together with some takeaways on the next slide here so number one SPX is a cash settled index that replicates the sp500 movement so I keep to keep referring back to the set price some people might be saying well doesn't this just turn into stock well no it does not since it's a cash-settled index we are dealing with a settlement price and that settlement price is what determines the PNL of the position so there's no actual SPX components where we can actually buy the stock or sell the stock there is no stock in play at all so it's very similar to something like the VIX which would settle to vro so it's very similar and one thing to keep in mind with SPX is that it's traded in five cent increments so we get a ton of enquiries on the support line about SPX and when you're looking at placing an order or routing an order adjusting an order if it's not in a five cent increment it's going to decline the order and send it right back to you so whenever you're trading SPX make sure that it's in a five cent increment to make sure that the order will actually go through secondly SPX weekly expirations are having a friday friday trading close so when we're looking at the weekly expirations we can act as if this is a normal position like an apple or Google as we stated before where the last day to trade it would be Friday and after the close that's when it would be determined based on the piano again the the set price would not come into play here it's going to be coming in off of the clip closing price of SPX that day so weeklies will pretty much act like a normal expiration would however the SPX regular expiration is going to settle to that set price so the last day to trade it is in fact going to be Thursday before the close and lastly set can be drastically different than SPX closing print and this is really important I can't stress this enough this has happened to me before because I didn't even know that this existed I was trading SPX so this is a huge eye-opener and definitely something to be aware of regardless of whether we're trading to find risk or undefined risk this can either hurt us or help us depending on what's going on so if we're looking to avoid that set price and that set determination of the P&L maybe we consider closing the trade prior to that so hopefully this has shed some light on SPX for you my name is Mike if you've got any questions or feedback at all shoot me an email support at.com or support a tastytrade.com or you can shoot me a tweet at doe trader Mike will be back again at the same time tomorrow so have a good night hey everyone thanks for watching our video if you liked this video give it a thumbs up or share it with a friend click below to watch more videos subscribe to our channel or go to our website

Channel: tastytrade

Views: 29,396

Rating: 4.8413363 out of 5

Keywords: investing, finance, Trading, Trader, Stock, market, learn to trade, beginner trading, options, options trading, stock options, tastytrade, profit, trading tutorial, trading basics, Mike & His White Board, SET price, SET, PM Settlement, AM Settlement, $SPX

Id: Gn_hectm2eU

Length: 9min 30sec (570 seconds)

Published: Fri Feb 05 2016