Hi
Have some interesting questions for experienced options traders. I think this thread, if it picks up, will be very useful for other new traders like me.
Please feel free to nitpick, find loopholes and play devil's advocate. The more mistakes you can spot the better!
Eg. I want to trade the S&P500 index options. My trading strategy is to trade calendar spreads, ie. I sell a near month call with one month to expiry and buy a far month call of the same strike price.
A calendar spread seeks to profit by the near month option losing its value through time decay faster than the far month option. It will profit if the underlying does not move up or down much.
I'm interested to know the exact mechanics of opening/closing out this trade. Let's first imagine that the trade has already been opened, ie. I'm short a near month call and long a far month call of the same strike. Here are the contract details for S&P500 index options.
Expiration Months:
Three near-term months followed by three additional months from the March quarterly cycle (March, June, September and December).
Expiration Date:
Saturday following the third Friday of the expiration month.
Exercise Style:
European - SPX options generally may be exercised only on the last business day before expiration.
Last Trading Day:
Trading in SPX options will ordinarily cease on the business day (usually a Thursday) preceding the day on which the exercise-settlement value is calculated.
Settlement of Option Exercise:
The exercise-settlement value, SET, is calculated using the opening (first) reported sales price in the primary market of each component stock on the last business day (usually a Friday) before the expiration date. If a stock in the index does not open on the day on which the exercise & settlement value is determined, the last reported sales price in the primary market will be used in calculating the exercise-settlement value. The exercise-settlement amount is equal to the difference between the exercise- settlement value, SET, and the exercise price of the option, multiplied by $100. Exercise will result in delivery of cash on the business day following expiration.
Option Trading Hours
8:30 a.m. - 3:15 p.m. Central Time (Chicago time).
These are my questions.
1) From the above information, does it mean that the near month call I wrote will cease trading at 3.15pm on the 3rd Thursday of the month? And I will not be able to buy back this option after close of the 3rd Thursday of the month?
2) Settlement of Option Excercise takes place on the 3rd friday of the month, on this whole day, the options that expire in that month will not be traded. Your profit/loss for the near month call option only, will be calculated based on the price you sold the call option for (using the calendar spread example), and the opening price of the underlying on the 3rd friday (if its a trading day). If Friday is not a trading day, the price is determined using the closing price of the underlying on Thursday. Is this correct?
Here comes the fun and interesting part, the mechanics of placing trades.
1) To initiate a new calendar spread trade, I should place my order to buy/sell anytime on the 3rd Friday of the month.
2) I hold the position for one month. Lets say that now one month has passed, and I want to close out my trade. I'm letting the near month option expire (or get excercised), and I'm going to close the trade by selling the far month option (which at this time has 1 month left). I should place my sell order near closing time of the 3rd Thursday of the month. Or should I do it first thing on Friday morning?
3) I will not know my profit/loss till Friday morning when the markets opened, and the price the near month option expired at is calculated using Friday morning's opening price of the underlying.
4) This question may sound a little strange. By reading the above specs, it seems there are S&P500 futures contract that expires in March, June, Sept and Dec. Does this mean all options that have expirys in Jan, Feb and Mar are options for the S&P500 contract that expires in Mar, and options that expire in April, May and June are for the S&P500 contract that expires in June, and so on?
Does this mean that if I'm trading calendar spreads, I can do the following :-
i) Sell Jan 4725 call and buy Mar 4725 call
ii) Sell Jan 4725 call and buy Feb 4725 call
but I cannot (or should not) do the following
iii) Sell Jan 4725 call and buy Apr 4725 call
Does it also mean that in the month of March, I will not be able to trade calendar spreads, unless I sell April calls and bought May calls of the same strike?
If any of the above is unclear, pls let me know and I'll try to explain. Thanks very much for taking the time to read this far, and offer your expertise!
HL
Have some interesting questions for experienced options traders. I think this thread, if it picks up, will be very useful for other new traders like me.
Please feel free to nitpick, find loopholes and play devil's advocate. The more mistakes you can spot the better!
Eg. I want to trade the S&P500 index options. My trading strategy is to trade calendar spreads, ie. I sell a near month call with one month to expiry and buy a far month call of the same strike price.
A calendar spread seeks to profit by the near month option losing its value through time decay faster than the far month option. It will profit if the underlying does not move up or down much.
I'm interested to know the exact mechanics of opening/closing out this trade. Let's first imagine that the trade has already been opened, ie. I'm short a near month call and long a far month call of the same strike. Here are the contract details for S&P500 index options.
Expiration Months:
Three near-term months followed by three additional months from the March quarterly cycle (March, June, September and December).
Expiration Date:
Saturday following the third Friday of the expiration month.
Exercise Style:
European - SPX options generally may be exercised only on the last business day before expiration.
Last Trading Day:
Trading in SPX options will ordinarily cease on the business day (usually a Thursday) preceding the day on which the exercise-settlement value is calculated.
Settlement of Option Exercise:
The exercise-settlement value, SET, is calculated using the opening (first) reported sales price in the primary market of each component stock on the last business day (usually a Friday) before the expiration date. If a stock in the index does not open on the day on which the exercise & settlement value is determined, the last reported sales price in the primary market will be used in calculating the exercise-settlement value. The exercise-settlement amount is equal to the difference between the exercise- settlement value, SET, and the exercise price of the option, multiplied by $100. Exercise will result in delivery of cash on the business day following expiration.
Option Trading Hours
8:30 a.m. - 3:15 p.m. Central Time (Chicago time).
These are my questions.
1) From the above information, does it mean that the near month call I wrote will cease trading at 3.15pm on the 3rd Thursday of the month? And I will not be able to buy back this option after close of the 3rd Thursday of the month?
2) Settlement of Option Excercise takes place on the 3rd friday of the month, on this whole day, the options that expire in that month will not be traded. Your profit/loss for the near month call option only, will be calculated based on the price you sold the call option for (using the calendar spread example), and the opening price of the underlying on the 3rd friday (if its a trading day). If Friday is not a trading day, the price is determined using the closing price of the underlying on Thursday. Is this correct?
Here comes the fun and interesting part, the mechanics of placing trades.
1) To initiate a new calendar spread trade, I should place my order to buy/sell anytime on the 3rd Friday of the month.
2) I hold the position for one month. Lets say that now one month has passed, and I want to close out my trade. I'm letting the near month option expire (or get excercised), and I'm going to close the trade by selling the far month option (which at this time has 1 month left). I should place my sell order near closing time of the 3rd Thursday of the month. Or should I do it first thing on Friday morning?
3) I will not know my profit/loss till Friday morning when the markets opened, and the price the near month option expired at is calculated using Friday morning's opening price of the underlying.
4) This question may sound a little strange. By reading the above specs, it seems there are S&P500 futures contract that expires in March, June, Sept and Dec. Does this mean all options that have expirys in Jan, Feb and Mar are options for the S&P500 contract that expires in Mar, and options that expire in April, May and June are for the S&P500 contract that expires in June, and so on?
Does this mean that if I'm trading calendar spreads, I can do the following :-
i) Sell Jan 4725 call and buy Mar 4725 call
ii) Sell Jan 4725 call and buy Feb 4725 call
but I cannot (or should not) do the following
iii) Sell Jan 4725 call and buy Apr 4725 call
Does it also mean that in the month of March, I will not be able to trade calendar spreads, unless I sell April calls and bought May calls of the same strike?
If any of the above is unclear, pls let me know and I'll try to explain. Thanks very much for taking the time to read this far, and offer your expertise!
HL
