My broker sent me the following message: "Your current level will allow you to trade debit spreads on equities and credit spreads in cash indexes." Can anyone tell me what a 'cash indexes' are? Thanks edit - Subject heading
Cash indexes are the S&P 500, S&P Midcap, The Dow 30, The Russell 2000, etc. As opposed to the futures indexes that are tied to the cash indexes.
Cash index actually refers to how the options themselves settle. If you buy 1 call contract in GE and it ends up in the money. It would expire into 100 shares of GE. If you by a cash settled index option (btw most of the cash settled indexes end in X). So if you are long 1 SPX call that ends up in the money, it would expire into the value of the SPX time 100. So if you were long 1 900 call in the spx that ended up in the money, you would end up paying the writer 900*100 or 90,000, in place of buying a specific security. Cash indexes can be american or european. One thing to understand though is how they expire. Most end trading on thursday evening with a print on friday morning. Make sure you understand this if you are trading these options. Mark S. www.option911.com
As you can see OP - "cash index" means different things to different people. But getting back to your original question, all that matters to you is what "cash index" means to your broker. So to know what you can and cannot trade, you really need to ask your broker for a clarification. Or, you could open an account with a broker that doesn't care about "levels" (such as IB) and is happy to let you risk your money as you see fit.
Maybe the OP has a cash account and not a margin account, in which case-- would any broker allow any spreads to be traded unless they are European style?
Just want to clarify Mark (Option911)'s post. If you write a SPX 900 call and it expires in the money, what you pay depends on the value of the index at the morning print (it is called the SET) on the Friday morning of expiry. The option ceases trading on the Thursday afternoon, and you have to wait until the Friday morning to find out what it is going to be worth. So, if the SET is 926, you will have to pay 26*100 for each option you have written. This can be very expensive, so I recommend avoiding the SET under most circumstances. You can either roll unto the next month, or pay to close out the position. If you choose to hold, you probably should have a futures account, sufficient knowledge to trade the ES (or other index futures) and enough margin to buy a matching amount of futures in the event that the ES goes above the strike price of your options , but you'll probably lose a fair bit of sleep if you try to slug it out that way. Trust me on this one. I know from bitter experience what can happen! You don't want to have a very nasty surprise in the morning, and be unable to do anything but kiss your margin goodbye. The NDX and the RUT also work this way. Make sure you understand this and are fully aware of the relevant dates of expiry for the security you are trading before you begin doing this. If you are thinking about writing options, make sure you only use a small amount of margin to start with, until you are certain that you know all the ins and outs of the risks, and option price behaviour. Beginning traders are often surprised by how much the prices change during a day. It doesn't hurt to paper trade for a few months to get a better feel for how things go. Beware though, that midpoint fills don't always happen in the real world.
Thanks for all the replies. I have two brokers. One will let me trade pretty much as I please, except no selling naked calls and puts. Paper trading and experience has shown me that I am most successful selling credit spreads, especially the SPY. This has a lot to do with my job and not always able to take the time to look for stocks. Sometimes weeks or months will go by before finding a trade to enter. I want to go further OTM, particularly during these times, so I sought out another broker. This broker is supposed to specialize in options. They have cleaner and easier interface for options, and smaller commissions. I tried to place a credit spread (iron condor to be exact) and was told I was not able to trade this. I queried them and in the OP is what I was told. As such I will stay with my current broker and cancel the other account. It is sad, because they also have a nice paper trading set up and 'limit buy on the open or cancel' order types. I am looking at opening a futures account to see if I have the mental fortitude and skill set to successfully day trade. Currently paper trading on Go Futures, but looking at opening an AMP Futures account. As long as I use the money management that I used when first starting to trade I should be fine. Becoming a successful futures trader, time will tell.
option911 wrote: So if you are long 1 SPX call that ends up in the money, it would expire into the value of the SPX time 100. So if you were long 1 900 call in the spx that ended up in the money, you would end up paying the writer 900*100 or 90,000, in place of buying a specific security JohnGreen wrote: So, if the SET is 926, you will have to pay 26*100 for each option you have written... Which is correct? Steve
If you are long 900 call and the settlement index value is 926 then you would receive 26*100. If you are short 900 call then you would pay 26*100.