Stocks & Commodities V. 23:8 (43): Explore Your Options by Tom Gentile

Stocks & Commodities V. 23:8 (43): Explore Your Options by Tom Gentile

Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.

S&P 500 INDEX OPTIONS SETTLEMENT

Are Standard & Poor’s 500 ($SPX) options settled American-style or European- style? Can they be assigned or exercised before expiration?

S&P 500 options settle Europeanstyle, which means that they can only be exercised at expiration. In fact, most index options settle European-style.

There are a few exceptions, however. For example, options on the S&P 100 ($OEX) settle American-style, and exercise or assignment can take place at any time prior to expiration.

Exchange-traded funds (ETFs) also settle American-style, as do stock options, which can be exercised at any time before expiration. So traders who want to trade the S&P 500, but with options with American-style settlement, will trade options on the S&P 500 SPDRS (SPY) or “spiders,” because the SPY is an exchange-traded fund. However, to avoid the risk of early assignment with strategies like credit spreads, it’s sometimes better to use an index that settles European-style.