1993issue C021-5
Thursday's last S&P 500 print is not the Friday settlement
S&P 500 futures and options on those futures stop on the last trading day, normally the Thursday before the third Friday. Cash settlement is the next special opening quotation, so Thursday's close is only the last executable print.
- S&P 500 futures and options on those futures stop trading on the last trading day, normally the Thursday before the third Friday of the contract month, one business day before the final settlement price is set.
- Open futures cash-settle to a special opening quotation taken from component opening prices on the settlement morning, or from a stock's last sale if it does not open, not from Thursday's closing futures print.
- The settlement gap from 3:15 p.m. Thursday to 8:30 a.m. Friday can change the value used for variation-margin settlement, so a market-at-close order only fixes the position that enters that gap.
- An option-spread plus a market-on-close futures package has to be judged as one overnight procedure against the special opening quotation, not as a forecast of the cash index.
Last trading day and special opening quotation
Exchange rules ended trading in S&P 500 futures and options on those futures one business day before the final settlement price is determined. That last trading day is normally the Thursday before the third Friday of the contract month.
Open futures left into expiration are cash-settled to a special opening quotation of the cash index. The quotation is taken from component opening prices on the scheduled settlement morning, or from a stock's last sale if it does not open that day.
The settlement gap
Option-expiration-analysis starts after that last tradable print, because exercise, assignment, and cash settlement can restate the book once trading has already ended.
The settlement gap runs from 3:15 p.m. Thursday to 8:30 a.m. Friday. Overnight news and cash-market opening imbalances can change the value used for variation-margin settlement.
Cases that restated the Thursday book
On 21 September 1992, September futures closed at 420.15 after a short entry at 420.50. The next special opening quotation was 420.98, reversing the sign of the cash-settled result versus the Thursday close.
In December 1990, a 330 call that looked 0.35 points in the money versus Thursday's 330.35 futures settlement was exercised into a long futures at 330.00 and cash-settled to a special opening quotation of 334.05.
At the December 1991 expiration, a one-percent cut in the discount rate between Thursday's close and Friday's opening contributed to cash-stock opening imbalances, a limit-bid futures open, and a 385 call purchased at 0.10 being settled against a special opening quotation of 389.11.
Across nine recorded special opening quotations, eight printed above the previous day's futures settlement.
Market-at-close orders and the expiration option-spread
A market-at-close order seeks the closing print of the last trading session so the position that enters the overnight settlement gap is the one actually intended. It does not choose the Friday special opening quotation.
After inexpensive expiration options became more widely recognized and more expensive, a September 1992 experiment sold a 420 call and a 420 put 15 minutes before the close for 0.80 each, then bought futures market-on-close at 420.15 while the contract traded near the strike.
A rising market is not a settlement feature
The tendency for the special opening quotation to exceed the prior close was noted as possibly reflecting a contemporaneous rising equity market rather than a permanent feature of the settlement rule.