Index Options
Trading options on the Spiders ETF is a convenient way to trade the
Standard & Poor’s (S&P) 500. But it’s not the only way. There are other
option contracts listed on the S&P 500. The SPX is one of the major ones.
The SPX is an index option contract. There are some very important
differences between ETF options like SPY and index options like SPX.
The first difference is the underlying. The underlying for ETF options is
100 shares of the ETF. The underlying for index options is the numerical
value of the index. So if the S&P 500 is at 1303.50, the underlying for SPX
options is 1303.50. When an SPX call option is exercised, instead of getting
100 shares of something, the exerciser gets the ITM cash value of the
option times $100. Again, with SPX at 1303.50, if a 1300 call is exercised,
the exerciser gets $350—that’s 1303.50 minus 1300, times $100. This is
called cash settlement .
Many index options are European, which means no early exercise. At
expiration, any long ITM options in a trader’s inventory result in an account
credit; any short ITMs result in a debit of the ITM value times $100. The
settlement process for determining whether a European-style index option is
in-the-money at expiration is a little different, too. Often, these indexes are
a.m. settled. A.m.-settled index options will have actual expiration on the
conventional Saturday following the third Friday of the month. But the final
trading day is the Thursday before the expiration day. The final settlement
value of the index is determined by the opening prices of the components of
the index on Friday morning.