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Cash Settled

Cash settled financial instruments simply settle to cash instead of the underlying instrument at expiration. There are a few notable differences that cash settled instruments have when compared to other instruments like ETF’s like the SPY.

The SPY is an extremely liquid ETF that averages almost one million option contracts a day. Strike selection in this instrument is excellent, offering half-point and one point strikes. SPY has a standard Friday expiration, and has penny wide bid ask spreads due to its liquidity.

The SPX index is cash settled, and is less liquid than SPY. This index follows the European exercise rules, meaning we cannot exercise early on any option positions we hold. If an option expires ITM, no stock is delivered or called away as this index expires to cash. This means your account will be reduced by the difference of the settlement value and the strike of the option. SPX has a notional value that is ten times larger than SPY and has an average daily volume that is just under 900,000 contracts a day. The bid ask spread in SPX is much wider than SPY due to it’s large notional value and lower volume. Like many other cash settled instruments, the last trade day for SPX is the third Thursday of the month, since the expiration is settled in the A.M. on Friday.

At tastytrade we trade both instruments, but we prefer to trade ETF’s. ETF’s offer us more efficient market prices, more strike flexibility, and a higher volume across all strikes.

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