This article is aimed at alleviating some of the confusion about cash-settled indices. For the sake of simplicity, only three indices are going to be addressed: S & P 500 (SPX), Russell 2000 (RUT), and S & P 100 (OEX/XEO). None of these is the perfect product because they all have disadvantages. Figure 1 labels the imperfections of each.
Index ticker
Disadvantage
RUT
Volatile
SPX
Settlement time flip-flops
OEX/XEO
CBOE monopoly
Figure 1: Disadvantages
A reader could briefly glance at these disadvantages and quickly talk him or herself out of trading the indices because of that focus on the negatives. Quantum Physics studies show us that we, the ultimate observers, create our own reality. Hence, let us look at the three cash-settle indices one by one.
It is true that RUT, beta-wise, is more volatile that either of the S&Ps. It moves in wider ranges because of the impulsiveness of the Small Caps which are prone to reacting to the news. Yet at the same time, volatility is a matter of personal preference. Some traders, mostly conservative ones, do not like big swings whereas others, moderately aggressive ones, love it. On a positive note, RUT settlement is always on Friday’s open with the last trading day being Thursday, regardless if they are weekly or regular monthly options.
Unlike the stable RUT settlement time, SPX options settlement time flip-flops between the weekly and the monthly options. The regular monthly options on SPX settle on Friday’s opening print. But the SPX weekly options settle on Friday’s close. To recap, SPX weekly settle at 4:00 PM EST and… Continue Reading
