Course · Act II: Expiration Day · Chapter 9
Cash-settled index options
Cash vs. physical settlement, why SPX options pay cash and SPY options deliver shares, AM-settled monthly SPX vs. PM-settled SPXW, and the Section 1256 60/40 tax rule.
Key terms
- Cash settlement
- Settling an option by paying the difference between the settlement value and the strike, times $100, instead of delivering shares.
- AM and PM settlement
- Standard monthly SPX options settle on Friday’s opening prices after trading stops Thursday; SPXW options settle on expiration day’s close.
- Section 1256 contract
- US tax category that includes broad-based index options like SPX: 60% long-term, 40% short-term, marked to market at year-end.
“Settlement: SPX vs SPY” is part of the full course: 6 puzzles on cash-settled index options. RocketCo is fictional, and none of this is a trade. Try this act’s free chapter, “Exercise and Assignment”, first.
“Settlement: SPX vs SPY” is in Act II: Expiration Day. 6 puzzles, unlimited retries.
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