How to Settle an SPX Trade at Closing

Settling SPX trades can cause confusion.

SPX is an index option that tracks the Standard & Poor's 500 Index (S&P 500). Though It is one of the most commonly traded cash-settled index options, it often leaves investors scratching their heads when it comes to the issue of settlement. This is most commonly because some investors of SPX options are unaware that there are different settlement times for the weekly, monthly, and quarterly listings of SPX. Investors should also be aware that settlement of an SPX option is in cash, and does not involve taking delivery of shares.

Instructions

1. Make sure you know what SPX options you are buying or currently holding, because they have differing expiration days. Weekly, or end-of-the-week ("Week-End") options expire at the close of trading every Friday. These options are traded every week, except for the third week of each month. Monthly listings of SPX options expire on the Saturday following the third Friday of the expiration month. Quarterly SPX options expire on the last business day of the calendar quarter: March, June, September and December.

2. Keep in mind that, as with all options, one option contract has a multiplier of $100. That means when an SPX option is trading at $2, its price is $200.

3. Collect the settlement in cash by exercising the SPX option on the business day following expiration. It really is that simple. If an investor has SPX options with a strike price of 1200, for example, and SPX finishes at 1205, then the investor would have made $500 --- 5 times the $100 multiple --- minus the initial cost of the SPX option and brokerage commission and fees.

4. Settle your SPX trade by doing nothing. If your option ends in the money, there will be an automatic exercising of the option, in the form of a cash deposit to your trading account by your broker. If the option expires out of the money, then it expires worthless, and your loss will be the total price you paid plus any brokerage commission and fees.

Tips & Warnings

• As with all options, an SPX option uses leverage and suffers from time decay. Always keep in mind that one option contract has a $100 multiplier. Though profits can be great, so too is the risk.

References

• CBOE: End Of Week (i.e. "WEEK-END") S&P 500 Index Options Product Description
• CBOE: S&P 500 Index Options
• CBOE: QUARTERLY S&P 500 (SPX) Index Options
• InvestorPlace: Futures Offer a Fast and Liquid Market; by Adam Warner; July 2011