Interesting thing happened yesterday. The OEX settled at 746.75 yesterday. Options continue to trade until 4:15 est in this index. I noticed that call options that were expiring into cash were trading .05 over cash. For example the 745 calls were 1.80 bid, the 740 calls were 6.80 bid. This would seem like a free .05 (as it did to many people as over 1,000 traded in the last few minutes.) At 4:45 they remarked the OEX to 747.72, causing a $100,000 loss to whoever sold the calls to make a nickle. The SPX was also marked up by over a dollar. Apparently in APC there was a bad trade a second before the close (over 40 below the previous trade) that moved the indexes down in the last seconds. It took awhile to get this thrown out and recalculate the indexes.
Wow. That's pretty interesting. I was wondering why my pnl got marked down substantially after the close. (I'm short SPX delta and have no position in APC).
The European settled index options don't settle in the usual way people expect. It's probably best to close these option positions the day before expiry rather than risk an adverse move you can't do anything about.
This had always been a 'free money" trade. With the OEX settling at about 4:02, you could sell or buy an expiring option 5-10 cents over/under parity. There was usually someone who wanted to close out a position instead of letting it exercise into cash. This 'free money" wasn't so free on Friday.
Who wouldn't let it settle to cash? It must be a risk premium (as exhibited on Friday). In single stocks you see this because people don't want to take delivery or uncertainty around their delta position on monday.
It frees up margin to allow another trade. If you let a postion settle to cash, it will take up margin until it comes off your sheets.