Hello all,
I am currently trying to make clear the process of option and futures settlement. Aplogies if I have posted in the wrong section, there wasn't one for settlement that I could see.
For futures, I understand that between the first notice day and the last notice day any short position holder can tender for delivery, and an opposing long position is 'delivered against' usually randomly depending on exchange. After the last traded day all other open positions are then paired off for delivery automatically.
For options I understand that this time it is the buyer and not the seller who has the right / choice. The long position holder exercises and a short position holder is randomly assigned. This is fine for european style, as all options exercises would occur on the same day.
However, here are my questions which I hope you guys can clarify for me concerning the delivery process....
1) When a client decides to tender for delivery, he is telling the exchange he is not going to close his position, but wants to make delivery of the underlying. Once he /she notifies the exchange do proceedings then start straight away for delivery, or does this wait until settlement day? If it waits until settlement day then why bother to tender? Why not just leave the position short and be automatically matched with a long position for delivery on the Last notice day???
Clearly I am missing something here, and would be grateful if you could fill in the blanks!!
2) The same goes for options (american style)... When you choose to exercise your long position, someone is randomly assigned (be it to make or take delivery). Again, do proceedings begin concerning delivery at this point, or does actual physical movement of the underlying vs cash actually wait until settlement?
Again, what confuses me is who would exercise their right to the underlying if they then couldn't make use of the underlying anytime soon in the physical market / in another covered options play?
Sorry if this all sounds a little dense on my part, but once I understand this I think I will have the theory of settlement sussed in my mind. I've looked in several books but none give a clear 'time-line' style definition to the order of proceedings for either futures or options. It seems most books are aimed at speculation, and avoid talking with any clarity or detail on this matter.
Any help would be most appreciated.
Thank you for your time.
Dave
I am currently trying to make clear the process of option and futures settlement. Aplogies if I have posted in the wrong section, there wasn't one for settlement that I could see.
For futures, I understand that between the first notice day and the last notice day any short position holder can tender for delivery, and an opposing long position is 'delivered against' usually randomly depending on exchange. After the last traded day all other open positions are then paired off for delivery automatically.
For options I understand that this time it is the buyer and not the seller who has the right / choice. The long position holder exercises and a short position holder is randomly assigned. This is fine for european style, as all options exercises would occur on the same day.
However, here are my questions which I hope you guys can clarify for me concerning the delivery process....
1) When a client decides to tender for delivery, he is telling the exchange he is not going to close his position, but wants to make delivery of the underlying. Once he /she notifies the exchange do proceedings then start straight away for delivery, or does this wait until settlement day? If it waits until settlement day then why bother to tender? Why not just leave the position short and be automatically matched with a long position for delivery on the Last notice day???
Clearly I am missing something here, and would be grateful if you could fill in the blanks!!
2) The same goes for options (american style)... When you choose to exercise your long position, someone is randomly assigned (be it to make or take delivery). Again, do proceedings begin concerning delivery at this point, or does actual physical movement of the underlying vs cash actually wait until settlement?
Again, what confuses me is who would exercise their right to the underlying if they then couldn't make use of the underlying anytime soon in the physical market / in another covered options play?
Sorry if this all sounds a little dense on my part, but once I understand this I think I will have the theory of settlement sussed in my mind. I've looked in several books but none give a clear 'time-line' style definition to the order of proceedings for either futures or options. It seems most books are aimed at speculation, and avoid talking with any clarity or detail on this matter.
Any help would be most appreciated.
Thank you for your time.
Dave
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