Re: A hedge for the option "Geeks"//Link
Thanks keahou. Index options expire very differently from stock options. With stocks, what you see is what you get: stock closes out of the money and you keep all the premium from the short call or put you sold. Stock closes in the money and your long call or put is worth the difference between the strike and the close price.
But with index options, where the index closes isn't what determines in- or out-of-the money-ness. That's determined by the settlement price, which is based not on the close, but on where the stocks in the index open on the following day. Not only that, but because those stocks open at different times, the settlement isn't determined at the open but minutes sometimes many minutes later. You can get very whacked holding an open index option position into expiration.
I'm not sure anything is wrong that CBOE should correct. I do think they could make options more straightforward in various ways. But options are derivative instruments, much more flexible than binary buy or sell for stocks, and a certain amount of complexity is probably inherent. So it's caveat emptor (or venditor) for now.