Trading the CBOE’s SPX AM and PM settled Options


Updated: Feb 26th, 2016 | Vance Harwood

If you need options on the S&P 500 the CBOE’s SPX series is one of the most popular solutions in the marketplace.  The CBOE continues to enhance this product with additional expirations—the latest being the addition of options expiring on Wednesday afternoons.

If you haven’t reviewed the CBOE’s SPX, SPXW and SPXPM  options you should—they can save money, enhance your profits, and eliminate some risks.

First about the money, SPX/SPXPMs are:

  • 10X the size of SPY options,  reducing commission costs if you are trading positions of that size.  Their price is roughly 10X the equivalent SPY option. If the SPX options are too large for you the CBOE also offers XSP contracts which are approximately the same notional size as SPX options.   XSP options have same characteristics as SPX options but tend to have wider spreads and not as much liquidity.
  • Considered taxable as section 1256 contracts—generally 60% of your gains are treated as long term, regardless of how long you hold them
  • Cash settled so there is no need to close out a trade just to eliminate the risk of an option being exercised, or expiring in the money and triggering a buy or sell of the security.

SPX/SPXPMs reduce aggravation because:

  • They eliminate pin risk, and any other scenarios where you end up long or short securities when your options expire in the money
  • They can only be exercised at expiration (European style), so there is no risk of early assignment unbalancing a spread position.   You don’t have worry about ex-dividend dates triggering assignments.
  • For SPXPM and SPXW options there are no delays in settlement—the settlement price of SPX (ticker SET) can sometimes be delayed an hour or more because order imbalances delay trading on some stocks, the market close is inherently more orderly.

I’ve traded SPX/SPXW/SPXPM options for a while now, and there’ve been a few surprises, some good, some bad.

  •  There are six flavors of SPX options:
    • The standard AM settled options that expire on the morning of the third Friday of the  month (SPX).  These are floor traded and tend to have relatively wide bid/ask spreads.  Their expiration value is published under the ticker SET  (^SET for Yahoo Finance).
    • Five PM settled flavors: the Wednesday (new) and Friday Weeklies, the End of Month, the Quarterlys, and the PM version of the SPX (SPXPM)  that settles Friday afternoon on the Fridays where the AM settled options expire also.   The first four show up under the SPX option chain, but their ticker is SPXW, the SPXPM options have their own chain.   The Quarterlies will trump the Weeklys and the End of Month if they all fall in the same week.   The PM expiring options use the standard S&P 500 Friday close SPX (^GSPC for Yahoo Finance) as their expiration value.
  • If you want Friday PM settlement on the traditional monthly expiration week you must use the SPXPM symbol, for the other weeks use SPX.  User beware.
  • The minimum increment on prices, even spreads is $0.05
  • Close to the money strikes are offered at 5 point intervals (e.g., 1795 / 1800), the equivalent on SPY options would be 179.5 / 180.   These 5 point intervals enable tight credit / debit spreads and better resolution in placing positions.
  • The bid / ask spreads on AM settled SPX options tend to be wide, the PM settled options are somewhat better. For SPX options, a  limit order halfway between the bid and ask will usually fill.  Never use a market order—you are leaving money on the table.  This is one area where SPY options are superior.
  • Non-expiring SPX/SPXpm options trade until 15 minutes after regular market close
  • Even when AM expiring SPX options have expired, some broker’s software (e.g. Schwab and Fidelity) will not consider them closed until the following Monday.  This is problematic if you have a calendar option position in place with the expired options as the short leg.  A work around for this in order to effectively close out your long position is to roll it up to a much higher strike.  This requires some margin, but at least you can effectively cover your position.

Trading SPX options in IRA accounts can have some wrinkles.  Schwab doesn’t support them at all in IRA accounts, they claim software issues.  Fidelity supports vertical spreads as well as Optionsxpress, but Optionsxpress doesn’t allow calendar spreads.

 

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Friday, February 26th, 2016 | Vance Harwood
  • B1llmoo

     Nice Article. I think you can trade in your IRA with at least 10k for spreads on indexes. I have been a big fan of the SPX but the spreads suck. I have not traded SPXPM might give it a chance.