If there's one thing you should have learned by now it's that Wall Street will make money by any means it can get away with. If a trader is long 10,000 SPX 1170 calls and he can make them worth a few million dollars by doing a quick trade in the futures market that loses him one million dollars, he'll do it. I think you're naive if you think this sort of thing never happens. Take a good look at the SPX chart for 3/19/2010 with one minute bars. Ask yourself how plausible that opening bar is, especially considering that it opens over 6 points above the Thursday close (and at the highest price for SPX since the 2008 crash). There was no support for the opening price at all, SPX headed south for the rest of the day, losing 14 points overall, 4 of them in the first minute. For the option guys all that mattered was that opening price, what happened 60 seconds later was irrelevant. I've made many losing trades that I blame on no one but my own misplaced optimism. As it happens, I was short a March SPX 1175/1185 call spread that made money; I wasn't hurt by the up gap. But for those short the 1170 calls I don't blame them at all if they suspect that there was more than blind market forces at work here. Of course it's very convenient for the big players that most people are too sophisticated to believe in conspiracy theories.
Isn't it considered very risky, because of the uncertainty of the SET, for a retail trader to hold these positions to expiration? Shouldn't retail traders have closed these positions no later than say Wednesday?
A fair question. The problem is that on Tuesday and Wednesday SPX was high enough that it was hard to find a good point where you could stop out. I don't think you could ever have got out of a short 1170/1180 call spread for less than 2.00 during that time, not much better than the 2.95 it ultimately settled at. So it was by no means obvious that it was worth stopping out. At the close on Wednesday SPX was under 1166. While gap ups of 4 points or more certainly do happen, they're less common than not. So a holder of a short 1170/1180 call spread near the end of the trading day would probably have felt justified in holding to expiration when stopping out would have cost at least 2.00. I had sold my own SPX 1175/1185 call spread some time before for 0.65. At the close on Wednesday buying it back would have cost 0.90. So for me the only way I had a chance of making a profit was by holding to expiration. Lucking for me SPX didn't gap up all the way to 1175. All this makes me wonder if I shouldn't be trading on SPY instead, where the options trade on Friday and settle on Saturday. There's a lot less settlement risk.
This is far from unusual. You are rewarded for the settlement risk in SPX options by the premium. If you don't like it, don't trade it.
All true. However, do you know haw many times these guys that try to work the market up or down on size or in a quick moment to make money on a larger option or index settlement position lose ? Often when they lose its very large, so in the long run its gambling just like anyone trying to guess where the price will be in 5 minutes 30 minutes or a couple days.... they make money sometimes and they lose sometimes......... The way "traders" really made money was to be on the floor or pit and get "information" about buy sell orders and use it, workes "most" of the time Now you have to figure out how to obtain or put those probabilities on your side sitting in front of a screen....... not as easy, but I do think its there
I appreciate the responses. The S&P closed thursday @ 1165.8 and the futures called for a flat opening. I find it very hard to see how 7 pts could have been added to a flat opening.