Options Bootcamp 64: Settlement Myths and Misconceptions

Basic Training: Today we are going into the depths of option settlement. A question that is often asked in Group Coaching is that of the various settlement issues.

Many option traders limit their universe of option trading to two broad categories:

1. One group consists of individual equities and the similar group of exchange traded funds (ETFs).
2. The other group is composed of a multitude of broad based index products.

Individual equities and ETFs trade until the close of market on the third Friday of each month for the monthly series contracts. These days there are more and more ETFs and equities that also have weekly settlements too. These contracts are of American type and as such can be exercised by the owner of the contracts for any reason whatsoever at any time until their expiration.

• What is automatic exercise?
• Equity settlement?
• Cash settled indexes?
• Determining settlement?

Mail Call: Listener questions and comments

• Question from Mike: Hello, Love the show. I am curious as to why one would ever use a collar instead of a bull put spread. Am I incorrect in thinking these strategies are identical with respect to risk/reward? Since the put spread will cost less to put on, it seems like the better trade. As an additional advantage, there is no need to tie up the capitol to hold the underlying. Thanks for your help.
• Question from Yukoner: Do you ever do spreads in LEAPS? Why and how? So I used to trade the LEAPS rather than buy the stock. Is that a good use case?
• Question from TradeCraft: Is there a correlation between high options OI and options price levels?
• Comment from Ian Felder: I started off in crude futures, then moved to VIX futures, now VIX options. Each time I trade a new market, I feel like I see more panoramic moves because I am less familiar with the underlying in the first few days. It sounds scary, but it is actually refreshing. I guess looking at options has changed the way I look at futures. Has something similar happened to you? Have options changed your outlook on other products?