SPX WEEKLY OPTIONS TRADING
For all you weekly option traders who have been trading and/or following the SPX options – there are some new ‘happenings’ with this particular options trading vehicle which are pretty darn cool if I do say so myself.
First, some quick background for those of you who may not have traded this particular index before.
Up until very recently the SPX regular monthly option contract traded up until Thursday of expiration – then settled at the open the following Friday morning. This is typical of European settled indexes such as the RUT, DJX, SPX and others.
What we weekly option trading investors like about the European settled indexes in that they can not be assigned before expiration like the American style options can. Instead the settle our as cash after expiration day. The American style of options – which most stocks and many ETF’s consist of – CAN be assigned before option expiration – which can cause a lot of problems to traders who have on option positions. This is why many – if not most – prefer trading the European style.
However, the down side to European options is that they settle on the morning following their last trading day – which creates overnight risk. If the underlying being used were to gap at the open from where it closed the night before – it is possible that option traders who carried open positions overnight could get burned and suffer trading losses.
Recently however, there have been some changes made to the SPX options that fix those concerns and gives options traders who want to use this underlying the ‘best of both worlds’.
Up until this point the SPX options have been the most popular options product for over 20 years. In 2005 weekly options were added to the SPX giving traders the ability to trade them on a weekly basis.
In October of 2011 there was a new SPX contract introduced called SPXPM which instead of settling on Friday morning at the open of the market – settle on Friday afternoon at the close just like the majority of other options and weekly options trading products.
But – unlike most if not all of the ‘other’ option contracts that settle on Friday at the close – the new SPXPM option contracts were still considered ‘European Style’ which meant that they could not be assigned or ‘exercised’ before their expiration date leaving the trader with actual stock. This is a huge benefit to traders because now they don’t have to worry about the overnight risk they would be forced to take previously – AND – they don’t have to worry about being assigned if one of their positions – or legs in a position – were to ever go ‘in the money’.
Some other interesting things about the SPXPM options:
They are are all electronic.
They are traded at the c2 exchange – the new all electronic portion of the Chicago Board of Options Exchange (the CBOE).
They now have 7 weekly option expirations which are all available for trading.
These new changes and additions are great news for option income traders – those who trade the regular monthly option strategies as well as those who trade the weekly options strategies.
Many of us who utilize strategies such as iron condors, butterfly spreads, calendar spreads, the credit spread and others have disliked the overnight risk that comes along with index options like the SPX, RUT, and other available ‘European Style’ contracts.
This new type of contract allows us to ‘have our cake and eat it too’.
Now we just need to get these same type of changes and added benefits applied to the other European Style indexes – for example the RUT.
To learn more about the SPXPM options and the recent changes visit the CBOE
To learn some very easy to implement and simple to trade option income strategies that can be used with these new option contracts (including weekly options trading strategies) join our complimentary no cost option trading newsletter by CLICKING HERE