Futures Options settlement at expiry?

Discussion in 'Index Futures' started by beefcaketrade, Dec 14, 2017.

  1. Say you were long ES futures and sold short covered calls for the big expiry friday tomorrow. And say those calls are now deep ITM.

    So futures contract settle in the morning according to the SOQ price calculated during early session. But FOP settles at 8pm that expiry date based on SOQ price of the contract.

    Does that mean you turn from long contract and covered call to being naked short a call during the day? Because the futures settle out first and is gone?

    I mean in terms of the impact on margins. Short options are heavily penalized on margin by say IB whereas covered options, or even just a futures contract is not. For example, I think it takes twice as much margin power to hold a naked short options than holding the underlying contract, which doesn't make sense as you carry the same risk but that's how IB does it.
  2. tommcginnis


    Don't forget that your margin will increase massively with the infusion of the ES→cash, so
    (but it's been a while!!!) I think "No fears."

    (OH AND!!! Technically, those won't be naked calls anymore, as the market has stopped trading them. So, they're a *liability*, but a fixed/known one. (As of SOQ, which also :) determined the value of the ESs-s-s-s-s.))

    I think. ;)

    I have used way too many emojis today.... :banghead:
    Last edited: Dec 14, 2017
  3. I thought futures settle daily? My cash level changes everyday on ES movement.

    So there won't be a large lump sum on the expiration, other than what it is if market underlying moved from prior day?

    I've never taken futures or FOP to expiration before. I often rolled them. Since ES is 50X multiplier, the only cash you need is the difference from SOQ and from your cost base price right? It works on price difference, not on face value right? So I don't get $133K (2660x50) on expiry lets say.
    Last edited: Dec 14, 2017
  4. tommcginnis


    The *safest* thing to do is be on the horn with your broker.
    Go step-by-step.
    Watch closely as things happen, and check to see that the actions that come to pass are as were represented to you.
    Lastly, keep track of any Change Of Resolution notices sent out in the future -- not so much the details (which you may happily forget) but the simple fact that they occurred, and need to be clarified in the future, as circumstances dictate.
  5. You're right the entire position basically comes off right at expiration and cash level reflected right away based on the options side of things. The futures I think settle daily so cash level changes were progressing daily. But winning debit options positions provide the lump sum at the end as they are marked at expiration or closing. And short ITM options take cash out in lump sum too. I suppose each broker may be different but at IB it is automated and they relaxed the margins when the contracts stopped trading in the morning, as the positions kind of turns to a cash position.
    Last edited: Dec 16, 2017
  6. tommcginnis


    It's the exchange, as well.
    Stuff cleared to CFTC rules (that near-instantaneous resolution of ES that you noted) is also so-way-badly subject to SPAN screwations in your account. (Godawful bad news.)
    Stuff cleared to SEC rules (SPX, say...) takes longer to resolve (2-4 hours? more?), but at least you margin requirements don't flop around like a beached salmon. :confused:
  7. Not sure how it works with other brokers. I was thinking maybe an old fashioned one might only settle out on saturday and cash levels reflected on the weekend, unlike IB that does it in the morning of big settlement friday.

    Also, technically the options settle at 8pm on friday. But IB was able to reflect the P&L and cash change accordingly in the morning (since the contracts have stopped trading, even though options don't expire until 8pm).
  8. tommcginnis


    No -- what you're observing is the nature of the ES FOPs for that expiry.