^RUT Cash settled Index option question

Discussion in 'Options' started by J-Law, Aug 19, 2010.

  1. J-Law


    This was brought to my attention by another trader.

    The Aug ^RUT 610 Puts with one day left to expiration for whatever reason has been priced exceedingly rich. They traded as high as 4.80 & settled at 2.22. The ^RUT settled @ 610.96 -17.08 (2.72%) on the session

    The next strikes lower, same expiration, were priced & closed at the following:

    610P - 2.22
    600P - .55
    590P - .25
    580P - .10
    570P - .10

    Remember one day to expiration. Can anyone think of why this series is priced so thick with 1 day out & still just an ATM and no intrinsic value?

    Any ideas? Anyone ???
  2. I don't trade RUT and don't know all the details, but I think this might explain it:


    From this link:

    "This means the option ceases trading on the Thursday however the settlement value is not determined until the market opens the following day. Overnight trading from Europe and Asia Pacific will influence the next days opening prices of the Russells constituents. But wait, there is more. The RUT does note settle based on the opening prices of the stocks that make up the RUT. RUT settlement is based on an index that trades under the symbol RLS [CBOE]. The RLS is described as the RUT Flex Opening Exercise Settlement. "

  3. MTE


    The second part of the text regarding the calculation of the settlement price in the link is wrong!

    Here's the text from CBOE's website, contract specifications for RUT options:

    "Exercise will result in delivery of cash on the business day following expiration. The exercise settlement value (RLS) is calculated using the first (opening) reported sales price in the primary market of each component security on the last business day (usually a Friday) before the expiration date... "
  4. MTE


    First of all, cash indices close at 4pm, while the options trade till 4:15, so that 610.96 doesn't reflect the slight drop in the futures after 4:00 while the options do reflect it.

    It doesn't really look all that weird. Just look at the SPX options for example. SPX closed at 1075.63, the 1075 put was 4.20 bid at 5.90. Or the NDX 1825 call 4.10 bid at 4.50, with NDX closing at 1823.
  5. Been burned by a strange open a couple of times. You think you are safe, and usually are, but those Friday openings can be a surprise when you check the account over the weekend.
  6. J-Law


    Thanks, guys.
  7. msecrist


    If You're talking about this month's cycle, the RUT actually settled Friday morning at $607.90. Considering how much can happen between Thursday's close and Friday's open, I'd say this pricing represents the premium the market maker puts on the risk of settling ITM. And... as it turned out, if you had sold a 610 naked put for $2.22, you'd have actually made $.12 after settling.

    However, I've had it turn out much worse where the RUT was $20 OTM on Thursday but settled $5 ITM on Friday. This is one reason I don't trade index options directly any more.

    I put an explanation of index options and settlement risk here: