What is AM settlement? What is PM settlement? At the CBOE site this is written in telegram-style: "PM-Settlement •Aligns with single-stock options and ETF options and with S&P 500 options traded OTC. •Preferred by many investors including those with end-of-day reporting needs. •The ability to trade in and out of positions on settlement day." Still don't understand...
AM settle means option stop trading on Thursday evening but their settlement price (how much you get at cash settlement) is not determined until Friday AM. This can be an issue as essentially you are at the mercy of an overnight gap. PM settled options trade until the end of day Friday and settle based on the last value of the index, which means you can get out of them up until the last minute if need to. Bottom line, honestly ONLY trade the PM settle. There's absolutey no reason why you'd trade the AM settle unlelss you're trading HUGE size and need to work your orders (the AMs are the ones that are monthlys so theres more liquidity there)
Add to the overnight gap there is a far more insidious issue with these. The AM settlement isn't the opening price of the index, for index options. It is the price determined by using the opening trade in each stock in the index. Even in the S&P 500 it's possible that constituent stocks don't have their first trade until minutes or even hours into the session. As a result, if the market moves sharply up or down right after the open, the settlement price may have very little relation to the opening index price. In fact, occasionally the settlement price is lower/higher than the actual index traded the entire session! AM settlement is useful to you if you are buying/selling each of the individual stocks in a constituent index, since you'd then trigger/pay the opening price. Otherwise it's a random thing that you're best avoiding by closing your position before settlement or using the PM settled options. Luckily with the Russell 2000 adding a PM close it appears CBOE is seeing a demand for PM closes and will add more products to the current small list.