Settlement and Expiration of Cash-Settled Index Options

How are cash-settled options handled at expiration?

First, do you have an AM or PM expiration option?

Remember the adage “what you see is you what you get”? We’re here to tell you: that DOES NOT apply to AM-Expiration cash-settled indices such as SPX, RUT, VIX, etc. due to their unique method of settlement. As a result, the last day to trade or close out of AM-expiring options is the day before expiration, which puts these options at the mercy of something called overnight risk.


However, some cash-settled index options expire based on the PM close, namely Weekly/Quarterly/EOM options. That means, rather than being at the mercy of overnight risk, the settlement bases on the market close (Last Price). When dealing with a PM-expiration option, you may refer to the explanation below, but instead, use the market close price as the settlement amount. 


Unlike trading in equity/ETF options, trading cash-settled indexes will never result in the delivery of stock, as cash-settled indexes (as the name suggests) settle in cash. 


To view a Table of Expiration and Settlement of Cash-Settled Indexes then click here.


How are AM-Expiration Options Handled?

We'll use SPX-AM option as an example

The best way to illustrate what will happen in a portfolio when a cash-settled index option expires in-the-money (ITM) is an example:


Let’s say you hold a monthly SPX-AM option

  • The spread expires ITM completely
  • SPX’s closing print the day before (Thursday) is: 2400


Example of Overnight Risk

You are holding a short one-lot 2410/2420 call spread in your portfolio; it has generated $3 in premium. You think you’re out-of-the-money and safe, free and clear. But... Friday rolls around, and there is a positive economic event that causes the SPX to rally. 


SPX suddenly gaps up 15 points to 2415, and you decide to close out your 2410/2420 short call spread to cut your losses. When you go to do this, you discover that you can’t, and are confronted with a platform error that reads: "Stopped symbols...(instruments_stopped_trading)" error. At first glance, this appears to be a nonsense error, but the piece of information you might be missing is that the last day of trading for SPX-AM monthly options is the day BEFORE expiration or Thursday.  


Now, you might already be pretty unhappy, but unfortunately, there is more to know. If you think that, just because the SPX opened up at 2415, your loss is only $200, think again.


How SPX-AM Options are Settled (SET)

You might be inclined to think (2410-2415) x 100 = -$500 + $300 credit received = -$200 loss, but the value of SPX for this calculation is determined by looking up the S&P Index Flex Settlement symbol: SET. The SET value is not the opening print of SPX, but rather a weighted average of opening prices of all S&P 500 underlyings. The SET amount publishes 30-45 minutes after the market open and is the settlement value of SPX that determines whether or not your position is ITM or OTM.


For this example, let's say the SET is published and you discover that its value is 2425. That means your position will have reached MAX Loss. Your short 2410 option will be assigned, and your long 2420 option will be exercised, resulting in an assignment fee of $5 and an exercise fee of $5 ($10 total). 


Since the options are cash-settled, the resulting cash position (in this case a cash outflow) will reflect in your account the next trading day.


Example of Cash-Settled Assignment & Exercise

ITM Spread

For this example, the resulting cash position upon expiration is $1,000 debit from your account. This is calculated as follows: 

  • Short 2410 call - 2425 SET value =  -$1,500 cash outflow
  • 2425 SET value - Long 2420 call = $500 cash inflow
  • -$1500 cash outflow + $500 cash inflow = -$1,000 total cash movement


Your call spread reached max loss:

$300 credit received - $1000 cash outflow = -$700 loss


OTM Spread

Now, let’s illustrate what will happen in a portfolio when an option on a cash-settled index like the SPX settles out-of-the-money (OTM). Here’s an example:


You are holding a short one-lot 2410/2420 call spread in your portfolio; it has generated $3 in premium. Let’s say the SPX settlement value is published at 2400. Your entire spread is OTM - congratulations, you get to keep the entirety of the credit you received from selling it. If there is no exercise or assignment, there are also no exercise or assignment fees. 


Partially ITM

Finally, let’s illustrate what will happen in a portfolio when an option on a cash-settled index like the SPX settles in between your strikes. Here’s an example:


You are holding a short one-lot 2410/2420 call spread in your portfolio; it has generated $3 in premium. Let’s say the SPX settlement value (SET) is published at 2415. What happens? Your short call is assigned the difference between the settlement value and the short strike. In this case, your short strike is 2410, and the SET is 2415. Your account would end up with a -$500 cash outflow. That is calculated as follows:

  • 2410 short strike - 2415 SET value = -$500 cash outflow. 

Your account would reflect a $500 debit. Since we received a $3.00, or $300, credit on the spread, the total loss would only be -$200 ($300 - $500 = -$200). In addition to this, you will be charged a $5 assignment fee.