So your capital is blocked until that time. Using index options — instead of individual stock options — provides some advantages. To trade index options, you truly must understand the process. But the truth is that the traders had no idea what the rules were, and have no one but themselves to blame. By visiting our site and accessing material, you are implicitly agreeing to these terms. The American style applies to all equities and ETFs (Basket 1), including ETFs based on indices – like the SPY or QQQ. They trade until the close of every third Friday of the month. It could have been political upheaval, a surprising earnings report from a major company, or simply the result of markets being substantially lower in Asia and Europe. commodities are typically cash settled. Physical settlement is the most commonly used form of The SEC created rules to govern the trading process, which includes outlines for the settlement date. PM settled options used the index value, as it normally calculated. You have to wait until the Index is settled. There are no underlying securities that exchange hands. when exercised; physical settlement and cash settlement. First of all, there are two types of Options settlement – American style and European style. The author of "The Rookie's Guide to Options," Mark Wolfinger was an options market maker and trader for the Chicago Board of Exchange for 23 years. For example, an unexpected news announcement for one specific stock may have a drastic effect on the price of that one stock, but it takes a big event to result in a similar percentage price change in an index. The settlement day for these Options are a little strange – they trade until the Thursday before the third Friday. And bear in mind, on Friday morning these Options are “locked”, so you cannot sell them or do anything with them. The clearing house then randomly selects a writer of To complicate matters further, there are two distinct methods for calculating the settlement price, depending on the characteristics of the option. There is no good reason to be holding index options that will expire on the opening of trading. result is basically the same; the holder either buys or When stock is for sale, prices open lower. OptionTiger is an educational site, and is not a financial adviser or broker. Copyright &© 2017 OptionsTrading.org - All Right Reserved. Below we explain both of these settlement types and However, or stocks that did not trade recently, the last price is used. Physically settled options are those that And if you’re an Option buyer and your Option is ITM, then you will be automatically exercised, unless you have informed your broker specifically that you don’t intend to exercise. The following scenario describes how "surprises" occur: It is fairly easy to prevent this unhappy scenario to hurt your account value. Cash settled options However, when the market gaped at the opening, the situation was very different and often produced an "unbelievable" value for the uninformed.