← AdvancedLesson 14 · 4:12
How do index options differ?
Summary
You can name four ways index options differ from stock options: cash settlement, European exercise, AM or PM settlement, and the size of one contract. You can explain how an AM settled option can cost a seller money while trading is shut.
Key terms
- cash settlement
- Ending an option by paying cash for its value instead of delivering shares.
- American style
- An option the buyer can exercise on any day before expiry, so a seller can be assigned early.
- European style
- An option that can only be exercised on its expiration date, so there is no early assignment.
- AM settlement
- Settlement from the opening prices on expiration day, after trading in the option has already stopped.
- special opening quotation
- Cboe's single number built from each index stock's first trade on Friday morning, used to settle AM options.
- PM settlement
- Settlement from the closing prices on expiration day, with trading allowed until then.
- XSP
- The Mini-SPX, tracking one tenth of the S&P 500, still worth $100 a point.
Check yourself
Answer each question to see why the right answer is right.
1. An SPX call with a 7,500 strike settles at 7,520. What arrives in your account?
2. SPX and XSP options are European style. What does that mean for a seller?
3. How is a standard monthly SPX option's final value set?
4. You sold an AM settled SPX 7,400 put. Thursday closes at 7,450. Overnight there is bad news, and Friday's opening value is 7,370. What happens?
5. With the S&P 500 at 7,541.40, how big was one SPX contract, and one XSP contract?
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