What Happens When S&P 500 Option Expires ITM?

Discussion in 'Options' started by Arnie Guitar, Jun 4, 2011.

  1. Exposing even more of my ignorance, and admitting I should know this before even considering selling S&P 500 Credit Spreads, what happens to your account if the S&P 500 closes in the money on a vertical bull put credit spread?

    For round numbers, let's say you had a $SPX.X 10/10 -1300/+1290 position, ie: you were short 10 June 3 1300 Puts and long 10 June 3 1290 Puts, and the S&P 500 closed at 1299 on expiration day. Would they take $1000.00 out of your account, would they take $13,000.00 out of your account, do they make you buy something? :confused:

    Also, what happens if the S&P 500 goes ITM during the tenure of your position, either intraday or at closing?

    I get it with a stock, if you're short 10 June 3 50 Puts of XYZ Corp and it goes or closes in the money on expiration or before, they make you buy 1000 shares of XYZ at $50, right? But what happens with Index options?

    Again, I apologize for my ignorance and offer thanks in advance for taking the time to educate me.

  2. Expires to cash on the open (monthly exp) or the close (weekly series).
  3. Could you, or someone else, please elaborate...you know, spoon feed this blue collar dummy. How much money are we talking?
  4. AG,

    SP are american style options. Therefore, if your higher strike goes in the money before expiration, technically speaking the long put holder can expire early against you. However, this is not something that i would fear bc it does not happen often.

    If a long option holder exercises early, it shows that they do not know how to use their optionality on the product. Think of it this way....

    if you are long a put and it goes in the money
    Long 10 lots 1300 SNP puts when the market is 1285..
    Just buy 10 lots of 1285 in the market against your option if you want to lock it in. There is no point in doing an early exercise bc you loose your optionality. So that means, if the market rally back up to 1305, you have a long 1285 position that becomes a free play. There is very little point in exercising early therefore it rarely happens.

    Lets say you are on expiration day, and one of your option strikes are in the money that you are short, than i believe in SNP you are technically Long at 1300 and run the risk of mark to market loss on that position bc you will be delivered a futures contract at that price for that particular options series. Now I dont trade SNP options so i dont know if you will have your options contract to be financially settled or whether you are assigned a futures contract but how this loss is realized doesnt necessarily change the underlying risk profile.

    My advice to you is that you should refrain from selling put spreads and develop a bettter understanding of your greeks, call and put parity and option convexity, bc if you end up with a PIN risk you will be able to better manage it.
  5. My first stop in understanding the characteristics of an options contract is the product specifications. It is well organized and easy to understand.

    Note the section Settlement of Option Exercise: for a good explanation of how settlement value is determined.
  6. Thank all of you for trying to answer my question.

    No offense guys but I think my question is pretty simple. I don't understand why people introduce several other scenarios. I asked a straight question with a specific scenario, and you didn't answer it.

    Please, could someone answer this simple hypothetical scenario:

    The position is:

    Short 10 June 3 S&P 500 1300 puts
    Long 10 June 3 S&P 500 1290 puts

    The S&P 500 closes at 1299 on expiration day, June 3rd.

    On the following Monday morning, what changes would I see in my account?

    That's it.

    Please, no "think of it this way" answers.

    It's a black and white question.

    On the following Monday morning, what changes would I see in my account?

    Thank you,

  7. If you read the contract specifications I referenced, you will see that your question has no answer as you stated it.

    First, settlement must be determined. That cannot happen until all stocks in the index have opened on the day following the last day of trading. Soooo, nothing happens in your account the next morning until settlement is determined. Once settlement is determined, the option will have only intrinsic value. OTM options will have zero value. For OEX, you will likely see a decrease in your account on Sat or Sun depending on your broker.
  8. MTE


    Options on S&P futures are American-style. Options on cash index (SPX) are actually European-style. In fact all index options are European-style, except OEX.
  9. MTE


    Index options are cash-settled so you pay/receive the difference between settlement and strike in cash. That is, each point is worth $100 so if you are short 1300 put and the settlement value is 1299, then your short put expires 1 point ITM, which means you pay $100 per contract and since you have 10 contracts you pay $1,000.
  10. Finally.

    Thank you Sir.

    #10     Jun 4, 2011