Cocoa option - expiration based on settlement?

Discussion in 'Ag Futures' started by heech, Sep 4, 2009.

  1. heech


    Hi guys,

    I'm a little confused by cocoa settlement. According to the ICE site, settlement of the underlying is at 11:50 EST. But of course the underlying trades all the way until 2 PM EST.

    So... my (short) cocoa OPTION positions... will they be exercised based on the price at 11:50 EST, or at 2 PM EST?

    I'm just not accustomed to settlement being so far from end of day pricing.
  2. TraDaToR


    Option Expiration based on settlement price = VWAP of all transactions between 11:48 and 11:50...

    Almost certain. Don't remember where I got this from...
  3. heech


    What confuses the issue for me is, for the option specs, it says this:

    "Expiration Date
    17:00 Eastern time on the last trading day. Automatic exercise at one tick or morein-the-money at expiration on last trading day."

    That manages to clarify absolutely nothing.
  4. heech


    You and I are both getting old. Looks like we've had a similar discussion before:

    Unfortunately, answer is still not clear. I just called up ICE, got transferred to market supervision in Newark... and they still aren't sure. They told me 1 PM EST, but it was a shaky "that's what they told me" answer.

    I have no idea why it would be 1 PM EST... electronic trading doesn't stop until 2 PM, while settlement was an hour and a half earlier.

    I'm crossing my fingers that cocoa doesn't cross any strikes between settlement and then, because I don't really want to go in to labor day weekend long/short contracts I don't need to be.

    EDIT: Scratch that, I get why it *could* be 1 PM EST. The serial option isn't traded electronically, only pit-based. I'm still not convinced that it means it's *exercised* based on underlying at 1 PM though...
  5. TraDaToR


    My 27 year old brain is disfunctioning sometimes...LOL. I knew I talked about it but didn't remember it was on ET.

    I got that in the rulebook :

    "Rule 9.49. Automatic Exercise Levels for Cocoa Options
    After the close on the Last Trading Day in the Cocoa Options Contract, the Clearing
    Organization will automatically exercise any open long Option that has a Strike Price below (in
    the case of a Call Option) or above (in the case of a Put Option) the Settlement Price of the
    Underlying Futures Contract on that day by an amount which equals or exceeds the minimum
    price increment permitted under the Rules for the Underlying Futures Contract, unless, before
    5:00 p.m. on the Last Trading Day, the Clearing Member carrying such Option gives the Clearing
    Organization written instructions that any such Option is to expire unexercised."

    Settlement price is 11:48 - 11:50. Sure about it. I use TAS orders sometimes.
  6. heech


    You know what's ridiculous? Even if that's what settlement price is, if underlying moves significantly away from settlement price (and I mean... 2 hours is a long to wait)...

    Then wouldn't whoever is long the option just make a request in writing to exercise/not exercised based on the closing price?

    How the heck do they expect someone who's short this thing to figure out what to do?
  7. TraDaToR


    LOL... I seriously don't know how it works and from the answers you get when calling, I'm not sure they know it either...You got to love ICE.:D
  8. heech


    The smart thing to do would've been to close out the option positions.
  9. heech


    Just a follow up on this... looks like the answer is: stay on your toes.

    Cocoa expiration worked out okay.

    But my sugar options from yesterday... settlement price at pit close was slightly above 21.75, but it ultimately closed under that price later in the day. Of 8 contracts at 21.75, I had 7 that were exercised and one declined.

    So, yea. I carried some unnecessary risk overnight. Oh well.
  10. TraDaToR


    Was short 22 calls for 3 months. Had to hedge with futures back and forth during all august and september...Horrible.
    #10     Sep 17, 2009