Allowing Options to Expire

Discussion in 'Options' started by i005890, Jul 16, 2009.

  1. i005890


    I have a long Jul 530/520 put vertical on RUT. Other than the risk that RUT moves above 520 and cuts into my profit, why should I not just let this expire? Won't I get the full $10 if I do?
  2. MTE


    Yes, assuming the index settlement price is below 520 tomorrow you will get the full 10 points. The problem is that the index is definitely within striking range and with GOOG earnings coming out after the close today, I'd assess whether the extra 1.5 or so(you should be able to sell the spread for around 8.5 based on current quotes) worth taking on the risk of holding thru expiration and potentially having the index settle at 525 or even higher.
  3. You do understand what MTE told you - right?

    Today's closing price on RUT is irrelevant. Only tomorrows settlement price is of importance to you.

    That quote is RLS and it will NOT be available until very late in the day tomorrow.

  4. As of the minute I am writing this the RUT is at 517. That is only three points away from the critical 520 mark. As MTE and Mark correctly pointed out, the opening prices tomorrow (what is called the opening print calculated by the exchange) are the critical factor that determines how much you will receive. This number is usually very close to the index value quotes you would see if you check the prices with your broker in the morning tomorrow.

    However, I have had an unpleasant experience with this once, and it did cost me real $$. There is a sinking feeling that is hard to describe as you watch the futures move toward your short strike, knowing that the market is 99% likely to get its initial direction from the futures in the morning. Unless you have a futures account with lots of margin available, there is nothing you can do to prevent or respond to this adverse movement!!

    With the RUT this close, I'd advise taking your profits, unless you can protect yourself with futures. It would be a shame to have a gap up in the morning wipe out all your gains.
  5. i005890


    Yes, I understand what MTE told me. Thanks all for responding.
  6. It is called the settlement price. It is not called 'the opening print as calculated by the exchange.'

    The number is often VERY DIFFERENT from the opening prices you see quoted.

    Where do you get your information? And more importantly, why do you think it's a good idea to spread mis-information?

    Next: to OP:

    Yes, there is something you can do.

    Please, please do NOT protect yourself with futures - unless you love taking massive losses when the market reverses. You can protect yourself by simply selling the spread. Or, you may buy the 520 calls.

    If you buy the 520 calls and sell the 530 calls, that's exactly equivalent to selling out your position, so I see no need to do that. But buying a small number of 520 calls is a much safer way to protect your investment than buying futures.

  7. MTE


    Futures won't do you much good. The settlement value is calculated off of the opening print of each individual stock in the index and it can be dramatically different from the opening index value, futures and it can even be several points higher than the high for the day or lower than the low.

    As of now, RUT is at 520.
  8. Mark-- I'm pretty disappointed in your reply, frankly. This is NOT a case of calling a put a call or a radical error in judgment and does not deserve the kind of reaction you responded with. I'm definitely NOT a rookie trader, and you should know that already since I have participated in numerous discussions with you here on elitetrader, and have generally agreed with most of your positions as being wise and sensible.

    I stand by my comments based on my experience. Admittedly, I don't trade the RUT, but based on my experiences with SPX and NDX, most of the time the differences between the settlement price (which IS calculated from the opening prints for each stock-perhaps my terminology was a bit off, but my understanding is NOT) and the quotes you see on your broker's screen at the market's open ARE relatively small. With the RUT, the differences may be somewhat larger occasionally due to the fact that many small company shares trade with less frequency and volume.

    Second, IF you read my comments carefully, you will note that there was a warning based on my own experience. I know EXACTLY what can happen!! I also gave some very specific advice in there to close the position without access to protection from the futures. Read my comments again, and you will see that this is so.

    Third, you CAN more or less protect yourself with futures contract overnight, although it will probably require a long night looking at the screen, and perhaps some trading losses and commissions costs if whipsaws occured. I do understand how to do this effectively, but generally it would not be worth it to lose a night's sleep unless the dollar amounts were quite large. In the scenario that would generate large losses to the OP, however, the protection would be very effective. If the RUT futures were to rise past 530 overnight ( on a fair value basis) in a relatively steady fashion, the protection afforded by the futures would be close to complete. In rare cases, it could actually be profitable on a net basis. Admittedly, this isn't the perfect solution, but it would be MUCH superior to watching helplessly!! Don't you agree?

    Finally, I admit that I rarely hold positions into the settlement process, and would NOT hold this RUT position overnight with it being so close (as I advised). Usually, I close my positions before expiry week for 0.15 or so if they are credit spreads, or roll them out. Debit spreads that are OTM can be held into expiry if they are protecting credit spreads for the next month without major concern since they can help you if the market gaps into the position overnight.

    I trust this clarifies my position and we can put this to rest.
  9. I actually went to the trouble of calculating the difference between the open for the RUT and the RLS (the settlement price) for the last six months just to be completely fair with Mark and MTE, who I both respect.

    Here is what I found:
    Expiry Date __ Open ___ RLS ____ Difference
    19/06/2009 __ 513.45 __517.24 __ 3.79
    15/05/2009 __ 480.96 __481.06 __ 0.1
    17/04/2009 __ 474.37 __475.52 __ 1.15
    20/03/2009 __ 415.05 __416.78 __ 1.73
    20/02/2009 __ 412.99 __409.86 __ 3.13
    16/01/2009 __ 462.81 __466.59 __ 3.78

    The largest difference in the last six months was 3.79, which suggests that it is not trivial, but not massive either, so we may both be off a bit, and our advice is the same in either event. Hopefully, the OP simply has sold his option spread for a tidy profit.

    If anyone would like to look into this further, and go back a few years, I'd be interested in their research. My suspicion is that the difference has probably narrowed over the last few years.
  10. Best regards,
    #10     Jul 16, 2009