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Is your smartphone spying on you?
Rumours that smartphones could be spying on us make for alarming reading, but is there any truth to these claims? The GHI investigates...
The GHI investigates
So, could our smartphones be spying on us? We decided to put this theory to the test. Our researcher set up two new smartphones (one iPhone and one Google Android) and added the Google, Facebook and Instagram apps, giving them access to the microphones on the phones (access isn't allowed by default but if you post a Facebook Live story or an Instagram story you have to grant the microphone access). Over the course of two weeks, we made several mentions within ‘earshot’ of the phones of a make-up brand, a kitchen appliance and a holiday destination we'd never searched for online.
Our verdict? In this instance, there was no evidence that these three apps were monitoring conversations for keywords, and using this information to serve up targeted ads. In fact, the only adverts we did see were based around items we'd been searching for online.
Protect your personal information
One study by researchers in the US showed that some Android smartphone apps did collect information from users. But instead of accessing the phone’s microphone to eavesdrop on conversations, the apps were much more interested in collecting information about what appeared on the phone’s screen. Some of the apps in the study collected photos from the user’s phone or used the phone’s camera to record video clips of screen activity. This showed what the user of the phone bought or searched for online, and even recorded their postcode.
GHI TIP: Turn off Ad Personalisation in your Google Account Settings , so your online activity and information shared with Google and the apps you use your Google account to sign-in with, are not used to personalise adverts.
Giving apps permission
Smartphone users in the UK have an average of between 60 and 90 apps on their phones, which means there’s potentially quite a lot of information that’s being gathered about each of us. Whether or not you’re bothered by the thought that the apps on your smartphone are collecting information about you, it’s good practice to check what access you’ve granted to the apps you’ve already installed.
Most apps will ask for personal information such as your name and email address, and many need access to certain features on your phone to do what they are designed to do. A weather app, for example, will need to know your location. A photo-editing app may need access to your phone’s camera. Some, though, may ask to tap into your calendar, your photos, or even your calls and contacts when they don’t really need to. Find out exactly what each app on your phone has access to in the phone’s Settings menu.
On an iPhone, go to Settings, select Privacy, then tap on one of your phone’s features in the list that appears – the Camera, for instance. You’ll then see a list of the apps that have requested access to this feature. Use the slider buttons to select which ones can have access and which ones can’t. On an Android device, choose Apps, Permissions and again select the specific feature and use the slider to revoke access.
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SPY Put Options are Being Assigned Early!
This week I was assigned put options with extrinsic value twice!
On May 11th, I was assigned a PUT option expiring on May 23rd. That's about 12 days to expiration.
Then, on May May 12th, I was assigned a PUT option expiring on May 16th. That's about 4 days to expiration.
I was under the impression that American style options were rarely exercised early. The usual case is that CALL options are exercised early to capture an upcoming dividend. But, these are PUT options, and they still have some time premium.
I do have corresponding long PUTs as the exercised options were part of spreads. I am fortunate enough that my account can handle buying 100 shares of SPY, but but being forced to buy a second 100 shares today zeroed out my cash balance and my margin balance is now negative because the money from exercising to offset the first assigned option has not settled. Is Mr. Market trying to induce a margin call by taking advantage of the T+2 settlement?
Trade Spx instead of spy if you don't want to risk assignment
Where can you do that?
Novice trader here, been selling covered calls for a little over a year now. Recently learned the put/call credit spreads. Lost my very first Put Credit Spread which was on SPY. What's the difference??
Pensions and other large institutional investors, which make up 90%+ of the American stock market, have volatility limits so their portfolios are literally unwinding.
This sounds like the best answer to me. Under normal circumstances someone long a put would wait and see. Their sale price is already set anyway.
If I was 99.9% sure a put would print I might exercise early just to have access to the funds.
Any data to show the leverage unwinding? I remember when btc got over leveraged I remember seeing some data about the unwind
This is the rho effect (the interest rate sensitivity Greek).
As interest rates go up, it can be optimal to exercise deep in the money puts early to generate interest income.
For example, let's say that that XYZ is trading at $10 and you are long a $100 strike put option that expires in one year. Interest rates are 5%.
If you do nothing with your put, you get your $10,000 in one year (100 shares times $100). If you exercise the puts today, your get the $10,000. You invest the $10,000 at 5%. In one year, you get $500 in interest. Thus, you are better off, all things equal, to exercise your puts early.
Now, before when interest rates were at 0%, you would get no interest income. Thus, all things equal, it would not matter if you exercised your put today, tomorrow, next month, or at expiration. There would be zero interest.
(Note that we are only talking about the rho effect here. There might be other reasons why someone would exercise an option early.)
Wouldn’t the time premium on the put incorporate the potential interest income? Why would you just not trade the sell the put instead of exercising it.
I barely heard any mention of RHO when I went through an options course. But this explanation makes sense. Someone may have had 100 shares of SPY, they owned a put to protect it, and SPY drops sharply. Maybe they wanted to buy I-bonds, so instead waiting for SPY to recover, they exercised and now they have money to do what they want.
Because of the Fed the interest rate component that makes up the pricing of an option has been a long forgotten stepchild. But now with inflation rearing its head and interest rates starting to rise this component is once again going to start to play its part in the pricing of options.
Also think about taxes. Say you bought your XYZ shares 2 years ago. You bought the put 3 months ago. Stock crashed to $10. If you sold the stock and the put, it would be mostly ST capital gains (or a LT loss on the stock and a ST gain on the option). Exercise the put at $100, all LT gains. It depends on the circumstances whether it makes sense, but you always are at risk.
American options can be exercised early, european cant.
That’s it I’m moving to Europe and sell options there.
“I was under the impression that American style options were rarely exercised early.”
One of the biggest myths that won’t die.
yup, early assignment has fucked me over several times
Be happy you’re assigned early. Just sell the stocks and you collect the remaining time premium. Win win
I ended up exercising the corresponding long puts I had. Max gains on the spread without having to wait for the spread to expire.
XSP Is the equivalents of SPY (about same price) and trades Euro style. Also has tax benefits vs SPY.
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We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.
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Fear of Options Assignment
One of the most common fears in option trading is one of early assignment. The fear of having a large number of shares (or a large short position) coupled with a potential margin call (or Reg-T call) causing a sudden shortage of cash in their accounts worries investors. Investors commonly view assignment as a huge potential risk.
It is not. (Well, it is rarely a problem). In fact, almost 99% of the time, early assignment is a better outcome. Below will set forth two common assignment examples, work through the potential outcomes, and demonstrate why assignment is typically a better outcome than having just held the position.
For Steady Option’s Anchor members, there is a persistent risk of being assigned a long stock position on the income producing portion of the strategy (the short SPY puts). This only happens in sharp market declines or very close to rolling of the position, but it can happen. Assignment risks increases the closer the position gets to a delta of 1. Most recently, this happened the week of May 13, 2019.For purposes of this example, we’ll use the actual SPY positions and walk through what did occur and could have occurred in other possible market situation.
In early May, the strategy sold four contracts of the May 20, 293 put for $3.11. The market started to drop. On May 19, 2019, the options were early exercised when SPY hit 285. The value of the contract when assigned was $8.11. All of a sudden, most accounts had 400 shares of SPY and were down $117,200 (4 contracts x 100 x $293). Most accounts don’t have cash in them to cover the position and may have received a Reg-T notice (a Reg-T notice is a form of a margin call by your broker). What is a trader to do?
Well first, the next trading day, simply close the position. Sell the stock, and the margin call should be covered. If it’s not, you can always sell other holdings to cover it. The way the Anchor Strategy is structured, it is virtually impossible not to have available cash or stock to cover in this situation. After closing the assigned position, is the trader worse or better off than if the position had been held? In all market conditions (up, down, flat), the trader is either in the same position as not having been assigned or better off.
Note: This assumption ignores transaction costs. Some accounts have assignment fees, different commissions for buying and selling stocks and options and other various fees. These fees could make a difference on the analysis, depending on a trader’s individual account. Since such fees vary widely, the below discussion ignores all fees.
The Market stays flat, SPY stays right at 285
In this case, the trader sells the assigned shares back at $285, facing a loss of $8.00/share. ($293 - $285)  . In other words, the trader has lost $1,956 ($8 stock loss less $3.11 received for selling the original position). This seems like a poor outcome.
 For purposes of this article, I am going to ignore the fact that the position was hedged and look at it just from the assignment point of view.
However , this is better than if the trader had just closed the short put at $8.11 at the market open. In that case, the trader would have lost $2,000. (($8.11 - $3.11) x 4 x 100). By being early assigned, the trader saved $0.11/share. This is what actually happened in actual trading the week of May 13.
The Market moves up the next morning
What would have happened though if the market had gone up? Let’s say to SPY $288. In this case, instead of selling the stock back at $285, you would sell it back at $288. That is a loss of $5 per share ($293 - $288) for a total loss of $756 on the trade ($5 - $3.11).
Once again , the trader is better off. Delta of the short put is not one , rather it had a dynamic average of .95. This means the value of the put would have declined not to $5.11 (the previous price of $8.11 - $5.11), but, by $2.85 to $5.26. Closing that option position would result in a loss of $860 on the trade ($5.26-$3.11).
The Market goes down
The scariest situation for a trader is waking up the next morning and the market has declined. Instead of SPY $285, the market might have continued to go down to SPY $282 (or worse). In this case, the trader sells the stock for $282, resulting in a loss of $11 per share for a total loss on the trade of $3,156 ($11-$3.11).
Yet again , the trader is better off. With the market going down from $285 to $282, the dynamic delta average is .98 and time value has dropped a bit, and the short put is now worth $11.03. Closing this put for a loss of $11.03 results in a total loss on the trade of $3,168. Even if the market had plunged down to SPY 100, the two positions would have been equivalent – meaning that the loss by being assigned equals the loss of having been in the short put.
In other words, in every market situation , the trader is either better off or exactly the same when assigned the position rather than having simply held the short put. The closer delta is to 1, the more likely you are to be assigned, but even in that situation, you would be no worse off between assignment and holding.
But if that’s true for puts, is it also true for calls?
Let’s take a common example. You sell 5 contracts of the $100 call on Stock ABC that is currently trading at $99 for $2.00. You are now short the $100 call. You receive $1,000. It expires in 3 weeks. Two weeks from now the stock is trading at $99.80 with earnings coming up tomorrow, and the option is trading at $1.00.You have $1,000 in cash and -$500 in call value. Someone exercises the option. The next morning your account looks like:
- Short 500 shares ABC at a value of $49,900
- Long $51,000 cash ($50,000 for sale of stock at $100/share plus $1,000 from the sale)
Are you in trouble? Did you lose money? Once again no, you’re not. Let’s look at what happens in each situation at market open :
The Market stays flat at $99.80
In this situation, you buy back the 500 shares of Stock ABC for $49,900. You keep the $51,000 and did not have to buy back the call. So you’re up $1,1000.
If you had not closed the position out, not been assigned, and the market stayed flat, the price of the option may have declined to around $0.50.
Clearly, you are better off because of the assignment – by over $800.
The Market goes down (any amount)
Earnings come out and the price drops to $90 (or any value below $100). In this situation, you buy back the 500 shares for $45,000. You keep the $51,000 and did not have to buy back the call. So you’re up $6,000.
If you had not closed the position out, not been assigned, and the market went down, the price of the option may have declined to $0.01.
Again, you are better off because of the assignment – by almost $6,000.
The Market goes up by less than $2 (to under $102)
Earnings come out, and the price increases to $102 (or anything between the last close and $102). You buy back the shares for $51,000. This nets out the cash you already had and did not have to buy back the calls. In this situation you break even.
If you had not closed the position out, not been assigned, and the market went up, the price of the option contract would have increased to at least $2.00.
In this case, you are in the same boat because of the assignment. Closing the short contract at $2.00 would cost you $1,000, which nets to $0.00 with the $1,000 you received from the sale.
The Market goes up by more than $2 (e.g. $110)
Earnings come out, and the price increases to $110. In this situation you must buy the shares back for $55,000. Offsetting with the cash already received, you have lost $4,000.
If you had not closed the position out, not been assigned, and the market went up a significant amount, the option price would have increased to at least $10. Closing this short contract out will cost $5,000. You are again better off because of the assignment.
In other words, in every situation you are in an equal or better situation because of an assignment. This is because options have time value – which an early assignment forfeits to the option contract holder. Even if the option contract had no time value left in it, the worst situation is still break even.
The only real risk to assignment is failing to quickly move and adjust the position (eliminate the oversized short position), your account goes into a Reg-T call, and your broker starts closing positions in a non-efficient manner.There are brokers who also require margin calls to be covered by cash deposits, instead of adjusting positions. (Very few). If that’s the case, you may get a demand for cash (and switch brokers).
As long as you stay on top of your positions and address any assignments, there is no reason to fear early assignment since in all situations you will be either equal or better off on early assignments . This is why I am almost always surprised by early assignments. The only time early assignment really ever makes sense is on surprise dividend announcements that weren’t originally calculated into the option prices – and even then, as the price of the option likely moved before the assignment occurred, there may be no impact.
What any option investor should always keep in mind is what to do if they get assigned early, what that will look like, and what trades will need to be entered the next business day. Being prepared prevents fear and mistakes – particularly when there is no need for that fear in the first place.
Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Strategy and Lorintine CapitalBlog.
- Can Options Assignment Cause Margin Call?
- Assignment Risks To Avoid
- The Right To Exercise An Option?
- Options Expiration: 6 Things To Know
- Early Exercise: Call Options
- Expiration Surprises To Avoid
- Assignment And Exercise: The Mental Block
- Should You Close Short Options On Expiration Friday?
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How to use the finest covered call strategy.
Investing in the stock market can be a great way to grow your wealth over time. However, it can also be a volatile and unpredictable place, with sudden swings in stock prices causing anxiety for even the most experienced investors. This is where the covered call strategy comes in - a popular options trading strategy that can help manage portfolio volatility.
By Kim, Wednesday at 03:11 PM
- Added by Kim
- Wednesday at 03:11 PM
Put/call parity is a crucial concept in options trading that establishes the basics of option pricing. The formula, introduced in 1969, came years before the seminal Black-Scholes pricing model. As such, it was one of the first formulations of quantitative option pricing and served as the foundation for future pioneers like Black, Merton, and Scholes.
By Pat Crawley, February 28
- Added by Pat Crawley
- February 28
What Are Cash-Settled Options?
Options are finite, wasting assets. They have a shelf-life, and they cease to exist after their expiration. So when that expiration date comes, there needs to be a mechanism in place to ensure that both sides of an option contract hold up their side of the bargain.
By Pat Crawley, February 23
- February 23
Everything You Need to Know About Options Assignment Risk
The fear of being assigned early on a short option position is enough to cripple many would-be options traders into sticking by their tried-and-true habit of simply buying puts or calls. After all, theoretically, the counterparty to your short options trade could exercise the option at any time, potentially triggering a Margin Call on your account if you’re undercapitalized.
By Pat Crawley, February 21
- February 21
Index Options vs. Stock Options: What's The Difference?
Most traders get their start with options in stock options. Perhaps they want to bet on a big move in a stock or hedge a long stock position. However, there’s more to the world of options than simply stock options, Index Options , which are options listed for indexes like the S&P 500 index or Nasdaq 100 index.
By Pat Crawley, February 17
- February 17
Why You Should Never Use a Stop Loss in Options Trading
Making the shift from ordinary financial instruments like stocks and futures to options requires several adjustments. For one, options are nonlinear--an option can go up 10% when the underlying goes from $50 to $51, and then double in price when the underlying goes from $51 to $52.
By Pat Crawley, February 15
- February 15
Gamma Risk Explained
Undoubtedly, options are more challenging to understand than stocks or futures. The stock price is based on the market's opinion of an honest company's value. An option, on the other hand, derives all of its value from the price of the underlying security.
By Pat Crawley, February 9
Straddle vs. Strangle Options Strategy
Options are dynamic, “delta-one” instruments, while stocks and futures are static. No matter how high the price of Tesla stock goes, a $1.00 move will create $1.00 in P&L per share. That same $1.00 price in an underlying alters the delta , gamma , and vega to the point where an option position evolves. The following $1.00 price move will have different implications.
By Pat Crawley, February 7
Option Settlement: The Basics
At their core, options involve buying and selling the rights to transact in a specific asset. When you buy a call option on AAPL, you're paying for the right to buy AAPL at a special price before a particular date. But all options expire, and at expiration, the two parties of the contract need to settle up with each other. This process is called settlement .
By Pat Crawley, February 6
Pros and Cons of Weekly Options
Weekly options used to be a niche product only reserved for gamblers and last-minute hedgers. However, weekly options are now listed on most major stocks and account for a significant portion of overall options trading.
By Pat Crawley, February 5
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Posted June 11, 2019
I dont disagree with what is said but regarding the SPY I made an interesting observation with regard to put positions. Check out this list with open interest of one of the shorter term SPY puts JUN14:
The Jun19 is the same - as a rough rule of thumb I noticed that if your short put is 10pts ITM with a week or less to go it tends to get assigned. Hence the zero OI.
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SPX Options Vs. Spy Options – Strategic Advantages and Differences
SPX has one major strategic advantage over SPY….
SPX is a European Style Option vs SPY being an American Style Option. This means that SPX is cash-settled at the expiration date, so it cannot be exercised prior to expiration as SPY can. An early exercise can blow your trading plan for any position!
If it wasn’t for this huge early expiration exercise risk with SPY, I would prefer SPY over SPX. This is because SPY, too, has a big strategic advantage over SPX in that SPY offers $1 wide strikes and also has a smaller contract value.
The main advantages this pricing allows are:
- The ability to trade a smaller trading account
- Trade with more flexibility in position sizing
- Easier scaling in and out of trades
Over the years, I’ve noticed that many of my trading club members have questions about trading SPX options vs SPY options, and exactly how to benefit from their strategic advantages. I share and answer many of those questions below.
By understanding many of the similarities and differences between SPX and SPY options, you can see what works best for your trading style. Since SPX and SPY are such popular trading vehicles, it’s worthwhile to be familiar with the basics of each.
SPY Vs SPX Overview
Both SPY and SPX options are used primarily for those looking to invest in the S&P 500. The S&P 500 index contract tracks the 500 of the largest publicly-traded company in the United States. In most cases, traders with more capital lean towards using SPX options, while those with less tend to use SPY. This is because SPX costs 10 times more than SPY, as you’ll read more about below.
Differences Between SPX and SPY
Also known as the Standard & Poor’s 500 Index, SPX bases its index off the 500 largest companies with shares listed on the NYSE or NASDAQ.
SPX is considered a capitalization-weighted index and functions as theoretical. SPX options have their settlement on Friday morning. Future contracts and options usually trade, but SPX may not always trade. SPX is also known for having a wider market and wider strikes than SPY.
On the other hand, SPY is an exchange-traded fund that bears the nickname “Spiders.” SPY tracks the performance of the S&P 500. Most of the time, you will find that the transaction price when using SPY will almost replicate SPX’s. Just like most other securities, SPY’s price is dictated through auction. Trading options for SPY stop trading on expiration Friday at the end of the close of business.
When trading larger options, SPY can produce more commissions. This is because of the potential for a larger number of contracts. SPY is known to have a lower price and buying power reduction. SPY options are always settled in shares.
Does SPY Pay a Dividend?
SPY pays a dividend that corresponds with the expiration day. This is a major difference between SPY options and SPX options.
An ex-dividend is the date when the buyer of stock can receive the last declared dividend. This usually takes place on the third Friday of March, June, September, and December. Ex-dividend day also corresponds with expiration day.
If you own in-the-money calls, then it is important this dividend not be lost. Often, traders with in-the-money options will use the options to collect the dividend. This means that often In-the-money calls are exercised on expiration Friday.
Does SPX Pay a Dividend?
Unlike SPY, SPX options don’t ever have to pay a dividend. This decreases the risk of triggering options assignments.
Are SPX Options Cash Settled?
No shares ever change hands, so SPX options are cash-settled. The difference between the settlement price and the strike price is automatically subtracted or added to the account balance at expiry.
Since SPX options are cash-settled, shares can’t be assigned before expiry. Because of this, SPX is often considered a cleaner way to trade. You won’t have to worry about an early assignment, because SPX options are only assigned at expiration, which is beneficial to the options seller.
Cash-settling also eliminates the risk of expiring in the money and triggering a buy or sell of the security. You also don’t have to worry about pin risk, which is when the market price of the underlier of an option contract at the time of the contract’s expiration is close to the option’s strike price.
Keep Reading or Grab My Options Toolkit Here
Settlement Price of SPX Options
Also known as the closing price, the settlement price is determined by the opening prices of the 500 stocks in the index. It is determined on the third Friday of the month.
The process for SPX options settling involves the in-the-money option value transferring to the option owner from the option seller’s account.
SPX contracts are known for being much larger than SPY contracts. They are about 10x larger, in fact. Some find an advantage in buying these larger contracts since it gives you the ability to average your price over several different price points.
Buying larger contracts may be a better option if you are an experienced trader. The price of SPX contracts is usually a lot more than SPY contracts, which can mean higher commission costs or fewer commission costs depending on how your commissions are charged.
Differences in Tax Treatment
Many find that SPX options offer a tax advantage because of the way the IRS treats SPY options and SPX options differ from one another. During a long-term tax rate, investors are usually allowed 60% of the profits from trade when using SPX options. These are usually treated as long-term, no matter how long you held them.
SPX options receive these advantages because the IRS gives SPX options special Section 1256 treatment.
From a tax standpoint, SPX can seem like the better option, but the tax implication in their treatment may not be significant enough to give them much of an advantage.
Be sure to check with your CPA since we don’t give tax advice and tax rules can and do change.
SPX Vs SPY Actual Cost
Again, another important distinction is that SPX contracts are much more expensive than SPY. For example, SPY options usually trade at around $120, while SPX options trade at around $1,200. This makes sense due to the fact that SPX options with the same strike price and expiry as their SPY counterparts will always equal 10x of one SPY option.
Are SPX American or European?
SPX options are European-style and can therefore only be exercised at the time of expiration. There is no risk of early exercise when using European-style options which is a nice advantage for option sellers. European-style options are cash-settled.
The cash received at the close is automatically deposited in the account of the option’s owner. Cash from investors who are short at the time of expiration will be removed from their accounts.
Other examples of European-style options include DJX: Dow Jones Industrial Average, NDX: NASDAQ 100 Index, and RUT: Russell 2000 Index.
When using European-style options, owners will lose their options but will receive the intrinsic value of the option in cash. Traders may find that the cash settlement feature to European-options is more convenient.
Are SPY Options American or European?
SPY options are American-style trading options, which gives option buyers the freedom to exercise these options before they expire. You will find that most equity options are American-style.
With American-style options, you receive the actual shares, which means you have the task of offsetting them yourself. This may mean you have to pay an additional commission. There are also several risks that come from holding shares for a limited amount of time.
SPY options are an ETF or exchange-traded fund. ETFs are marketable security options that act as an index fund but can be traded, making them more like a common stock.
Risk of Early Assignment when using SPY
American-style trading options possess the risk of early assignment, but this is usually only a problem if the option has very little time value or premium left.
Why is Implied Volatility Higher for SPY Options Than SPX?
Since the implied volatility is always based on the option price, SPY options will always be higher. This is because American-style options are usually more expensive when using the same underlying asset.
Liquidity of SPX and SPY Options
ETFs are known for being broad-based. Since SPY options have tighter markets, they are known to be more liquid than SPX options. SPY options usually feature a tighter speed between their bid and offer than SPX options making them more price efficient for traders and investors.
Because of its tighter markets, SPY options tend to have better price fills than SPX. In some cases, traders have found that the money saved from commissions end up lost in the spread between the bid and the offer when trading SPX.
Though SPY options are considered more liquid than SPX, both SPY and SPX are still both considered very liquid, because of their high trading volume. The high trading volumes of these options make them easy to enter and exit which is a huge benefit for option traders.
SPY Vs SPX Options Expiration
When using SPX, component stocks weigh themselves according to the market value of outstanding shares. While SPY options stop trading at the close of business on expiration Friday, SPX expires at different times, making them a bit more complicated.
Trading for most European-style trades stops trading at the third Thursday of each month. The next day’s opening price is where the settlement price comes from. This means that the price of an option can increase or decrease greatly, based on the price of the index on Thursday at closing to Friday at the opening. There are usually no delays in the settlement when using SPX options.
Decreasing your risk can be done by stopping your position before closing on Thursday. Avoiding any adverse movements will greatly decrease your risk in the long run. You may find that there’s no way to decrease the potential adverse price change in the option. This could increase the risk on the trade.
When SPX options expire on the third Friday of the month, they stop trading the day before that third Friday. This is only the case for SPX options that expire on the third Friday though. All others expire the same as SPY options.
Which Works Best for You – SPX or SPY?
Both SPX and SPY options are good trading vehicles when you are trying to profit off any increases or decreases in the S&P 500 index. There are benefits and disadvantages to both, so it is important to understand and choose which option will work best for you.
It is also important to consider the importance of risk and liquidity when choosing between these two popular option reading vehicles.
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Trading Options: Understanding Assignment
The options market can seem to have a language of its own. To the average investor, there are likely a number of unfamiliar terms, but for an individual with a short options position—someone who has sold call or put options—there is perhaps no term more important than " assignment "—the fulfilling of the requirements of an options contract.
Options trading carries risk and requires specific approval from an investor's brokerage firm. For information about the inherent risks and characteristics of the options market, refer to the Characteristics and Risks of Standardized Options also known as the Options Disclosure Document (ODD).
When someone buys options to open a new position ("Buy to Open"), they are buying a right —either the right to buy the underlying security at a specified price (the strike price) in the case of a call option, or the right to sell the underlying security in the case of a put option.
On the flip side, when an individual sells, or writes, an option to open a new position ("Sell to Open"), they are accepting an obligation —either an obligation to sell the underlying security at the strike price in the case of a call option or the obligation to buy that security in the case of a put option. When an individual sells options to open a new position, they are said to be "short" those options. The seller does this in exchange for receiving the option's premium from the buyer.
Learn more about options from FINRA or access free courses like Options 101 at OCC Learning .
American-style options allow the buyer of a contract to exercise at any time during the life of the contract, whereas European-style options can be exercised only during a specified period just prior to expiration. For an investor selling American-style options, one of the risks is that the investor may be called upon at any time during the contract's term to fulfill its obligations. That is, as long as a short options position remains open, the seller may be subject to "assignment" on any day equity markets are open.
What is assignment?
An option assignment represents the seller's obligation to fulfill the terms of the contract by either selling or buying the underlying security at the exercise price. This obligation is triggered when the buyer of an option contract exercises their right to buy or sell the underlying security.
To ensure fairness in the distribution of American-style and European-style option assignments, the Options Clearing Corporation (OCC), which is the options industry clearing house, has an established process to randomly assign exercise notices to firms with an account that has a short option position. Once a firm receives an assignment, it then assigns this notice to one of its customers who has a short option contract of the same series. This short option contract is selected from a pool of such customers, either at random or by some other procedure specific to the brokerage firm.
How does an investor know if an option position will be assigned?
While an option seller will always have some level of uncertainty, being assigned may be a somewhat predictable event. Only about 7% of options positions are typically exercised, but that does not imply that investors can expect to be assigned on only 7% of their short positions. Investors may have some, all or none of their short positions assigned.
And while the majority of American-style options exercises (and assignments) happen on or near the contract's expiration, a long options holder can exercise their right at any time, even if the underlying security is halted for trading. Someone may exercise their options early based upon a significant price movement in the underlying security or if shares become difficult to borrow as the result of a pending corporate action such as a buyout or takeover.
Note: European-style options can only be exercised during a specified period just prior to expiration. In U.S. markets, the majority of options on commodity and index futures are European-style, while options on stocks and exchange-traded funds (ETF) are American-style. So, while SPDR S&P 500, or SPY options, which are options tied to an ETF that tracks the S&P 500, are American-style options, S&P 500 Index options, or SPX options, which are tied to S&P 500 futures contracts, are European-style options.
What happens after an option is assigned?
An investor who is assigned on a short option position is required to meet the terms of the written option contract upon receiving notification of the assignment. In the case of a short equity call, the seller of the option must deliver stock at the strike price and in return receives cash. An investor who doesn't already own the shares will need to acquire and deliver shares in return for cash in the amount of the strike price, multiplied by 100, since each contract represents 100 shares. In the case of a short equity put, the seller of the option is required to purchase the stock at the strike price.
How might an investor's account balance fluctuate after opening a short options position?
It is normal to see an account balance fluctuate after opening a short option position. Investors who have questions or concerns or who do not understand reported trade balances and assets valuations should contact their brokerage firm immediately for an explanation. Please keep in mind that short option positions can incur substantial risk in certain situations.
For example, say XYZ stock is trading at $40 and an investor sells 10 contracts for XYZ July 50 calls at $1.00, collecting a premium of $1,000, since each contract represents 100 shares ($1.00 premium x 10 contracts x 100 shares). Consider what happens if XYZ stock increases to $60, the call is exercised by the option holder and the investor is assigned. Should the investor not own the stock, they must now acquire and deliver 1,000 shares of XYZ at a price of $50 per share. Given the current stock price of $60, the investor's short stock position would result in an unrealized loss of $9,000 (a $10,000 loss from delivering shares $10 below current stock price minus the $1,000 premium collected earlier).
Note: Even if the investor's short call position had not been assigned, the investor's account balance in this example would still be negatively affected—at least until the options expire if they are not exercised. The investor's account position would be updated to reflect the investor's unrealized loss—what they could lose if an option is exercised (and they are assigned) at the current market price. This update does not represent an actual loss (or gain) until the option is actually exercised and the investor is assigned.
What happens if an investor opened a multi-leg strategy, but one leg is assigned?
American-style option holders have the right to exercise their options position prior to expiration regardless of whether the options are in-, at- or out-of-the-money. Investors can be assigned if any market participant holding calls or puts of the same series submits an exercise notice to their brokerage firm. When one leg is assigned, subsequent action may be required, which could include closing or adjusting the remaining position to avoid potential capital or margin implications resulting from the assignment. These actions may not be attractive and may result in a loss or a less-than-ideal gain.
If an investor's short option is assigned, the investor will be required to perform in accordance with their obligation to purchase or deliver the underlying security, regardless of the overall risk of their position when taking into account other options that may be owned as part of the overall multi-leg strategy. If the investor owns an option that serves to limit the risk of the overall spread position, it is up to the investor to exercise that option or to take other action to limit risk.
Below are a couple of examples that underscore how important it is for every investor to understand the risks associated with potential assignment during market hours and potentially adverse price movements in afterhours trading.
Example #1: An investor is short March 50 XYZ puts and long March 55 XYZ puts. At the close of business on March expiration, XYZ is priced at $56 per share, and both puts are out of the money, which means they have no intrinsic value. However, due to an unexpected news announcement shortly after the closing bell, the price of XYZ drops to $40 in after-hours trading. This could result in an assignment of the short March 50 puts, requiring the investor to purchase shares of XYZ at $50 per share. The investor would have needed to exercise the long March 55 puts in order to realize the gain on the initial multi-leg position. If the investor did not exercise the March 55 puts, those puts may expire and the investor may be exposed to the loss on the XYZ purchase at $50, a $10 per share loss with XYZ now trading at $40 per share, without receiving the benefit of selling XYZ at $55.
Example #2: An investor is short March 50 XYZ puts and long April 50 XYZ puts. At the close of business on March expiration, XYZ is priced at $45 per share, and the investor is assigned XYZ stock at $50. The investor will now own shares of XYZ at $50, along with the April 50 XYZ puts, which may be exercised at the investor's discretion. If the investor chooses not to exercise the April 50 puts, they will be required to pay for the shares that were assigned to them on the short March 50 XYZ puts until the April 50 puts are exercised or shares are otherwise disposed of.
Note: In either example, the short put position may be assigned prior to expiration at the discretion of the option holder. Investors can check with their brokerage firm regarding their option exercise procedures and cut-off times.
For options-specific questions, you may contact OCC's Investor Education team at [email protected] , via chat on OptionsEducation.org or subscribe to the OIC newsletter . If you have questions about options trading in your brokerage account, we encourage you to contact your brokerage firm. If after doing so you have not resolved the issue or have additional concerns, you can contact FINRA .
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Why Option Settlement Style Matters
Options may be cash settled or physically delivered, which is particularly important when there is a gap move in the market.
In a rush? Watch the video to learn about the importance of different types of options settlements.
There are a number of different types of options contracts available on broad-based U.S. equity indexes. Some of the most actively traded products include options on SPY , SPX options, and the Mini-SPX contract (XSP SM ). They all track the S&P 500 ® and both SPY and Mini-SPX options have the same notional size, making them somewhat interchangeable. A key difference, however, is settlement style.
Options may be "cash settled" or "physically delivered." All equity (single stock) and ETF options physically deliver when exercised or assigned. In other words, at expiration, in-the-money options are exchanged for shares in the underlying security (equity or ETF). SPY ETF options expire into a long or short position in the ETF product. Index options, like Mini-SPX, are cash settled. This key difference is particularly important when we talk about "gap risk." Let’s explore.
Physical Share Settlement Can Add an Additional Risk into Your Trading Strategy
Assume an option trader is long (owns) one SPY 280 call that expires Friday. If the SPY ETF settles at 287.00, this option trader will end up long (owning) 100 shares of SPY on the Monday following expiration, and will be required to outlay $28,000 for 100 shares of the ETF. Come Monday morning, this trader has meaningful market exposure and potential downside risk should SPY move lower.
Assume another option trader is long (owns) one XSP 280 call that expires the same Friday. If XSP settles at 287.00 on expiration, the expiring 280 call would settle at 7.00, and the option trader would be credited the dollar difference between 7.00 and where the option had settled the previous day. (For example, if the 280 calls settled at 5.00 the previous day, the XSP option trader would be credited 2.00, or $200, at expiration).
This XSP option trader does not end up long/short any shares at expiration. The options cash settle, and therefore this option trader has no position and no directional risk the following Monday
S&P 500 Index
Physical share delivery may also trigger a taxable event from the standpoint of the IRS. The potential tax benefits of Index options vs. ETF options is covered in the next section. Read about the differences in tax treatment of index and ETF options .
There are important risks associated with transacting in any of the Cboe Company products discussed here. Before engaging in any transactions in those products, it is important for market participants to carefully review the disclosures and disclaimers below.
The information provided is for general education and information purposes only. No statement provided should be construed as a recommendation to buy or sell a security, future, financial instrument, investment fund, or other investment product (collectively, a “financial product”), or to provide investment advice.
In particular, the inclusion of a security or other instrument within an index is not a recommendation to buy, sell, or hold that security or any other instrument, nor should it be considered investment advice.
Options involve risk and are not suitable for all market participants. Prior to buying or selling an option, a person should review the Characteristics and Risks of Standardized Options (ODD) , which is required to be provided to all such persons. Copies of the ODD are available from your broker or from The Options Clearing Corporation, 125 S. Franklin Street, Suite 1200, Chicago, IL 60606.
Trading FLEX options may not be suitable for all options-qualified market participants. FLEX options strategies only should be considered by those with extensive prior options trading experience.
Uncovered option writing is suitable only for the knowledgeable market participant who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements. In this regard, if the value of the underlying instrument moves against an uncovered writer's options position, the writer may incur large losses in that options position and the participant’s broker may require significant additional margin payments. If a market participant does not make those margin payments, the broker may liquidate positions in the market participant’s account with little or no prior notice in accordance with the market participant’s margin agreement.
Futures trading is not suitable for all market participants and involves the risk of loss, which can be substantial and can exceed the amount of money deposited for a futures position. You should, therefore, carefully consider whether futures trading is suitable for you in light of your circumstances and financial resources. You should put at risk only funds that you can afford to lose without affecting your lifestyle.
For additional information regarding the risks associated with trading futures and security futures, see respectively the Risk Disclosure Statement set forth in Appendix A to CFTC Regulation 1.55(c) and the Risk Disclosure Statement for Security Futures Contracts.
VIX® Index and VIX® Index Products
The Cboe Volatility Index® (known as the VIX Index) is calculated and administered by Cboe Global Indices, LLC. The VIX Index is a financial benchmark designed to be a market estimate of expected volatility of the S&P 500® Index, and is calculated using the midpoint of quotes of certain S&P 500 Index options as further described in the methodology, rules and other information here .
VIX futures and Mini VIX futures, traded on Cboe Futures Exchange, LLC, and VIX options, traded on Cboe Options Exchange, Inc. (collectively, “VIX® Index Products”), are based on the VIX Index. VIX Index Products are complicated financial products only suitable for sophisticated market participants.
Transacting in VIX Index Products involves the risk of loss, which can be substantial and can exceed the amount of money deposited for a VIX Index Product position (except when buying options on VIX Index Products, in which case the potential loss is limited to the purchase price of the options).
Market participants should put at risk only funds that they can afford to lose without affecting their lifestyles.
Before transacting in VIX Index Products, market participants should fully inform themselves about the VIX Index and the characteristics and risks of VIX Index Products, including those described here. Market participants also should make sure they understand the product specifications for VIX Index Products ( VIX futures , Mini VIX futures and VIX options ) and the methodologies for calculating the underlying VIX Index and the settlement values for VIX Index Products. Answers to questions frequently asked about VIX Index products and how they are settled is available here .
Not Buy and Hold Investment: VIX Index Products are not suitable to buy and hold because:
- On their settlement date, VIX Index Products convert into a right to receive or an obligation to pay cash.
- The VIX Index generally tends to revert to or near its long-term average, rather than increase or decrease over the long term.
Volatility: The VIX Index is subject to greater percentage swings in a short period of time than is typical for stocks or stock indices, including the S&P 500 Index.
Expected Relationships: Expected relationships with other financial indicators or financial products may not hold. In particular:
- Although the VIX Index generally tends to be negatively correlated with the S&P 500 Index – such that one tends to move upward when the other moves downward and vice versa – that relationship is not always maintained.
- The prices for the nearest expiration of a VIX Index Product generally tend to move in relationship with movements in the VIX Index. However, this relationship may be undercut, depending on, for example, the amount of time to expiration for the VIX Index Product and on supply and demand in the market for that product.
- Mini VIX futures contracts trade separately from regular-sized VIX futures, so the prices and quotations for Mini VIX futures and regular-sized VIX futures may differ because of, for example, possible differences in the liquidity of those markets.
Final settlement Value: The method for calculating the final settlement value of a VIX Index Product is different from the method for calculating the VIX Index at times other than settlement, so there can be a divergence between the final settlement value of a VIX Index Product and the VIX Index value immediately before or after settlement. (See the SOQ Auction Information section here for additional information.)
Exchange Traded Products ("ETPs")
Cboe does not endorse or sell any ETP or other financial product, including those investment products that are or may be based on a Cboe index or methodology or on a non-Cboe index that is based on investment products trading on a Cboe Company exchange (e.g., VIX futures); and Cboe makes no representations regarding the advisability of investing in such products. An investor should consider the investment objectives, risks, charges, and expenses of these products carefully before investing. Investors also should carefully review the information provided in the prospectuses for these products.
Investments in ETPs involve risk, including the possible loss of principal, and are not appropriate for all investors. Non-traditional ETPs, including leveraged and inverse ETPs, pose additional risks and can result in magnified gains or losses in an investment. Specific risks relating to investment in an ETP are outlined in the fund prospectus and may include concentration risk, correlation risk, counterparty risk, credit risk, market risk, interest rate risk, volatility risk, tracking error risk, among others. Investors should consult with their tax advisors to determine how the profit and loss on any particular investment strategy will be taxed.
Cboe Strategy Benchmark Indices
Cboe Strategy Benchmark Indices are calculated and administered by Cboe Global Indices, LLC as described in the methodologies, rules and other information available here using information believed to be reliable, including market data from exchanges owned and operated by other Cboe Companies.
Strategy Benchmark Indices are designed to measure the performance of hypothetical portfolios comprised of one or more derivative instruments and other assets used as collateral. Past performance is not indicative of future results. Strategy Benchmark Indices are not financial products that can be invested in directly, but can be used as the basis for financial products or managing portfolios.
The actual performance of financial products such as mutual funds or managed accounts can differ significantly from the performance of the underlying index due to execution timing, market disruptions, lack of liquidity, brokerage expenses, transaction costs, tax consequences and other considerations that may not be applicable to the subject index. Index and Benchmark Values Prior to Launch Date
Index and benchmark values for the period prior to an index’s launch date are calculated by a theoretical approach involving back-testing historical data in accordance with the methodology in place on the launch date (unless otherwise stated). A limitation of back-testing is that it reflects the theoretical application of the index or benchmark methodology and selection of the index’s constituents in hindsight. Back-testing may not result in performance commensurate with prospective application of a methodology, especially during periods of high economic stress in which adjustments might be made. No back-tested approach can completely account for the impact of decisions that might have been made if calculations were made at the same time as the underlying market conditions occurred. There are numerous factors related to markets that cannot be, and have not been, accounted for in the preparation of back-tested index and benchmark information.
No Cboe Company is an investment adviser or tax advisor, and no representation is made regarding the advisability or tax consequences of investing in, holding or selling any financial product. A decision to invest in, hold or sell any financial product should not be made in reliance on any of the statements or information provided. Market participants are advised to make an investment in, hold or sell any financial product only after carefully considering the associated risks and tax consequences, including information detailed in any offering memorandum or similar document prepared by or on behalf of the issuer of the financial product, with the advice of a qualified professional investment adviser and tax advisor.
Under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded options and futures are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the market participants involved and the strategy employed satisfy the criteria of the Tax Code. Market participants should consult with their tax advisors to determine how the profit and loss on any particular option or futures strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations.
Past performance of an index or financial product is not indicative of future results.
Brokerage firms may require customers to post higher margins than any minimum margins specified.
No data, values or other content contained in this document (including without limitation, index values or information, ratings, credit-related analyses and data, research, valuations, strategies, methodologies and models) or any part thereof may be modified, reverse-engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of Cboe.
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Hypothetical scenarios are provided for illustrative purposes only. The actual performance of financial products can differ significantly from the performance of a hypothetical scenario due to execution timing, market disruptions, lack of liquidity, brokerage expenses, transaction costs, tax consequences and other considerations that may not be applicable to the hypothetical scenario.
Supporting documentation for statements, comparisons, statistics or other technical data provided is available by contacting Cboe at www.cboe.com/Contact .
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SPX Options vs. SPY Options: Which Should I Trade?
It's more than just trading options.
- What's the Difference?
Which Is Right For You?
The bottom line, frequently asked questions (faqs), what is options trading, how do you trade spx and spy options.
The Balance / Hilary Allison
Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.
What's the Difference Between SPX and SPY Options?
Dividends are not normally paid to options holders. However, SPY pays a dividend every quarter. This is vital because if you trade with in-the-money (ITM) call options, you can exercise them to collect the dividend. To do this, you need to exercise your options on SPY before the ex-dividend date or own shares and place a call (called a covered call option).
It is important to be alert when trading ITM calls because most calls are exercised for the dividend on expiration Friday. Therefore, if you own these options, you cannot afford to lose the dividend.
The ex-dividend day for SPY is the third Friday of March, June, September, and December. If that day doesn't fall on a business day, it is pushed to the next business day.
There are two different trading styles, European and American . European style options can only be exercised on the expiration date, while American options can be exercised any time before the expiry date.
SPY options are American-style and may be exercised at any time after the trader buys them (before they expire).
SPX options that expire on the third Friday stop trading the day before the third Friday (the third Thursday). On the third Friday, the settlement price is determined by the opening prices of each of the index's stocks. This price is the closing price for the expiration cycle. SPY options cease trading at the close of business on expiration Friday.
All SPX options expire at the close of business on expiration Friday. However, those that expire on the third Friday of the month do not.
SPY options are settled in shares. When you exercise your options, you'll buy (or sell) shares of the ETF. Cash is used to settle SPX options, so if you exercise and are in the money, you'll receive cash in your brokerage account.
An SPX option is also about 10 times the value of an SPY option. For example, on April 9, 2020, SPX closed at 2,789.82 points, and SPY closed at $278.20.
It's vital to grasp that one SPX option with the same strike price and expiration is approximately 10 times the value of one SPY option. Therefore, each SPX point was the same as $100.
For example, suppose SPX was at 2,660 points, and SPY traded near $266. One in-the-money SPX option gives its owner the right to buy $266,000 worth of the underlying asset ($100 x 2,660).
One SPY option gives its owner the right to buy $26,600 worth of ETF shares (10% of $266,000).
The assets within SPX do not trade, so there are no shares available to buy or sell. The options are written so that traders can bet on the S&P 500's price movements. SPX functions as a theoretical index with a price calculated as if it were a true index.
The 500 specific stocks in the index are rebalanced once per quarter in March, June, September, and December. You should watch for these times when trading options, as there might be new opportunities to enter and exit positions.
This means it has exactly the number of shares of each of the 500 stocks. So, while the SPX itself may not trade, both futures contracts and options based on the index do. This is why SPX options are settled in cash.
The SPY options are settled in shares because shares are being traded on an exchange. Therefore, the options contracts are written so that you take possession of shares when you exercise your option .
Which options are best for you depends upon your strategy and goals. If you want to take possession of shares to hold or trade again, SPY might work best. If you'd rather trade for value and receive cash in your account, SPX is an excellent choice.
Trading SPY options does bring some additional risk. For example, on the Monday following expiration, you end up owning shares. You'll owe the price of those shares at the expiry time, not the price on Monday. So if the price for the shares moves lower on Monday, you're paying more than they are worth on that day. However, if the price moves higher, you pay less than the current market price.
The two key differences between SPY vs. SPX options are that they are either American or European style, and SPY options are on an ETF while SPX options are on the prices of the index itself. You should understand the difference this makes for exercising your options. Additionally, the difference in value (and settlement) makes how much capital you have to buy the options important.
If you have more capital to spare and don't require dividends, SPX might be a good choice. On the other hand, SPY might be a better choice if you're a bit short on funds and can use the dividends.
Options are contracts that give the owner the right to buy or sell a security at a specific price within a specified period. Trading options is, in effect, trading the right to buy or sell those securities without the risk of the price changing. As the name implies, the owner has the option to buy or sell at that price during the contract period, but no obligation to do so.
As with any other day trading, you'll need to open a brokerage account to start trading SPX and SPY options. Find one that specializes in options trading and allows you to practice trading before you put real money on the line.
The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
Vanguard. " SPDR S&P 500 ETF Trust ," Page 3.
Vanguard. " SPDR S&P 500 ETF Trust ," Page 75.
Nasdaq. " SPDR S&P 500 (SPY) ."
Federal Reserve Bank of St. Louis. " S&P 500 ."
Chicago Board Options Exchange. " SPX Options Product Specification ."
Nasdaq. " Trading Calendar 2022 ."
U.S. Securities and Exchange Commission. " Options Trading ."
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SPX is cash settled so no assignment and cant be exercised. SPY can be assigned or exercised even before expiry date. If you are worried about assignment, its
The value of the contract when assigned was $8.11. All of a sudden, most accounts had 400 shares of SPY and were down $117,200 (4 contracts x
Since SPX options are cash-settled, shares can't be assigned before expiry. Because of this, SPX is often considered a cleaner way to trade.
An option assignment represents the seller's obligation to fulfill ... So, while SPDR S&P 500, or SPY options, which are options tied to an
If you are in-the-money, even by a penny, you will be assigned. Because both call options are both ITM, they will just cash settle. In essence, your short and
American style options can be exercised or assigned at any point in time on or before expiration. SPY (ETF) options are American style, meaning the option
stock) and ETF options physically deliver when exercised or assigned.
SPY options are American-style and may be exercised at any time after the trader buys them (before they expire). Expiration. SPX options that
This video is about selling monthly PUTS and CALLS against the S&P 500 Index. There are many approaches and this is a simple strategy that
The short call assignment: If the investor used a call spread and the short leg is assigned ... well, "Houston We Have a Problem". IRAs do not
In this video, we will look at how to set up a trade for trading options on the SPY when you are a long-term investor and how you can set up