fruju 1 Report post Posted October 16, 2014 I don't know whether this is the right place to ask, but I think Jesse and Kim have mentioned that there are no such thing as stupid questions... so here goes. I'm trying to understand the exact process for calculating whether a RUT option is in or out of the money at expiry. As an example, let's take this month's (October) RUT options. From reading the CBOE web site (http://www.cboe.com/Products/indexopts/rut_spec.aspx), I understand that the expiration date is Saturday, October 18th (will change to Fridays from early next year). Furthermore: Options can only be exercised on the last business day before expiration (i.e. tomorrow, Friday), as they are European style options. The settlement is delivery by cash on the business day following expiration (i.e. Monday). The exercise settlement value (RLS) is calculated using the first (opening) reported sales price in the primary market of each component security on the last business day (usually a Friday) before the expiration date. (my emphasis) The exercise-settlement amount is equal to the difference between the exercise-settlement value and the exercise price of the option, multiplied by $100. So, let me assume the following... Although tomorrow is the last business day before expiration, the only thing that matters in determining whether a RUT option is going to be exercised is what the Russell 2000 components open at tomorrow (Friday) morning, not what happens later during the day. For example, let's say the Russell 2000 opens tomorrow flat at around 1086. Even if we have yet another +30 day upswing and finish at 1115, the exercise settlement value will be around 1086 (may vary a bit depending on opening time of each component), and therefore a call option at say, 1100, would not be exercised. Is that correct? Share this post Link to post Share on other sites
Kim 7,512 Report post Posted October 17, 2014 Great question actually. Take a look - http://steadyoptions.com/articles/post/general/how-index-options-settlement-works-r57 The RLS is described as the RUT Flex Opening Exercise Settlement. The RLS is calculated by taking the opening price of each of the Russell 2000 stocks. Each day when the market opens all stocks don't start trading at the same time. So RLS might be very different from the opening value of RUT on Friday. In fact, it is possible that RLSs value will to be higher or lower than the RUT daily bar high/low.How is it possible that the value of the highest value of the RUT is less than the RLS opening price? It is due to the fact the RLS is based on the stocks opening price whilst the RUT is based on the Index value at that time. So if all the stocks in the RLS open at their days high and then trade down then the RLS will have a value much higher than the RUT. Share this post Link to post Share on other sites
